You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen?

arithmetic average return

Explanation:

The arithmetic average return is often best used in short periods (from 1 to 5 years) to make investment returns forcasting. A differentiating factor of this method is that it ignores the compounding effect and order of returns and thus could provide misleading forcast numbers when the investment returns are volatile.

Therefore, it may not be reliable if used for longer periods like 10 years and above.

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