Example on Average Rate of Return

It measures the constant factor with what the investment of a company needs to be multiplied each year to achieve the same effect as multiplying by 1.10 one year, 1.60 the next, and 1.20 the third and so on.
The constant factor, ‘t’ that needs to multiplied is the Geometric Mean (1.10*1.60*1.20)1/3. This Geometric Mean gives approx. 1.283, so the average rate of return is around 28% and not 30% which the arithmetic mean of 10%, 60%, and 20% would have given instead.