# Level 1 CFA® Exam: Geometric Mean Return

soleadea

11 months 1 week 6 days

*This blog post was created as a part of the CFA exam review series to help you in your level 1 exam revision, whether done regularly or shortly before your CFA exam.*

## Geometric Mean Formula for CFA Exam

\(R_G=\sqrt[T]{(1+R_1)\times(1+R_2)\times...\times(1+R_T)}-1\)

## 3 Tips for Calculating Geometric Mean Return

Here are the 3 things to remember when calculating geometric mean return:

- Remember to use the root (because we calculate a mean) and apply the right number of periods, e.g.:

- If we have 3 interest rates, we have to take the cube root (the one-third power).
- If we have 3 prices, we have to take the square root (because we have 2 rates of return: between Time 1 and Time 2 AND between Time 2 and Time 3).

- Remember to subtract 1 after taking the root.
- Remember that the number of shares doesn't matter.

### Geometric Mean Return – NO Dividends, Prices Given

If a company doesn’t pay dividends and you have to compute the geometric mean return over multiple periods, just divide the last price by the first price and take the appropriate root. The prices between the first and last periods are not important at all. Have a look at this example:

__Example__:

You are given 4 prices of a stock from the first to the last one: P1, P2, P3, P4. When computing the geometric mean, prices P2 and P3 are not important because:

\((1+R_G)^3=\frac{P2}{P1}\times\frac{P3}{P2}\times\frac{P4}{P3}=\frac{P4}{P1}\)

LAST UPDATE: 2 Nov 2023

About Soleadea:

*Our CFA Exam Study Planner is available to candidates of all levels at groundbreaking Pay-What-You-Can prices. You decide how much you want to pay for our services. After you activate your account, you get unlimited access to our Study Planner 4.0 with study lessons inside, various level 1/level 2 study materials & tools, regular review sessions, and a holistic growth approach to your preparation.* Join