metrics of portfolio return

Hi, James Lee

Thanks for reaching out.

The geometric mean return and the time-weighted rate of return (TWRR) are two distinct methods for calculating portfolio returns, each serving different purposes:

1. Geometric Mean Return: This measures the average return of an investment over a period, accounting for compounding, and is calculated by multiplying the returns of each period and taking the nth root, where n is the number of periods. This method is particularly useful for assessing the performance of an investment that varies in value over time since it smooths out fluctuations.

2. Time-Weighted Rate of Return (TWRR): This is used to measure the compound return of an investment portfolio over time, eliminating the effects of cash inflows and outflows. It's particularly valuable when comparing the performance of investment managers, as it demonstrates how well the investments performed irrespective of the timing and amounts of external capital changes.

When to Use Geometric Mean Return:

• Best suited for: It is often used when evaluating the performance of an investment across multiple periods, as it gives a more accurate representation of the actual growth rate of the investment.
• Avoiding External Cash Flows: If your portfolio had significant contributions or withdrawals during the investment horizon, the geometric mean will provide a clearer picture of the inherent performance by focusing solely on the investment returns.

In summary, use geometric mean return when you want a true representation of the performance of an investment over time, especially when it has experienced volatility or cash flows.

If you have more specific scenarios or examples you'd like to delve into, feel free to share!