Arithmetic Vs. Geometric Stock Returns
This video provides clarity about the confusion over the stock returns. The expected return of a stock is ambiguous because, if we assume returns are normal, then price levels are lognormal. In which case, the mean does not equal the median future stock price.
Consider these two questions:
1. What is the average return per month to realize a return of 20% over a period of 1 year. 2. What is the stock's return in an average month over a period of 1 year.
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