Travesty of travesties

There is something evil happening at the University of the Real Capital of Australia right now.

Rockett Girlfriend has a financial analysis assignment that she has asked me to look over. One of the things she has to do is rip apart the valuation model used in their case study by a hypothetical retarded financial analyst (how dare this hypothetical character use that hallowed title).

We got to the section on whether to use "arithmetic returns" or "geometric returns". Easy right. Apparently not. To the confusion of all finance students in the University of the Real Capital of Australia who have a modicum of maths skill, their lecturer (and probably their lecture notes as well) claimed that "the majority of finance people recommend arithmetic mean returns".

WHAT?!

Who uses arithmetic mean? Which firm do they work for? I want to know this. I will IMMEDIATELY short their stock. If they don't have stock, I will advise them to go through an IPO, and then I will IMMEDIATELY short their stock.

Can you imagine, throngs of university students graduating, thinking "arithmetic mean returns is the market standard calc for everything". They will go NUTS when they start working. "Geometric mean returns? Yeah, I've heard of that. What? You want me to value using geometric returns? Ummm yeah, of course I can. [sweat. gulp. pee.]"

As far as we care, arithmetic mean is a mathematical oddity that has no practical use. Like pi and imaginary numbers and the sideways 8 (actually, we like using the sideways 8 to demonstrate blue sky potential of our valuations, but that's another story).

Please, University of the Real Capital of Australia. DO NOT teach this crap to your students. When our stocks show returns of 25%, 60% and 128%, we only say "the three-year average return is 71%" for our simpleton investors because it's a bigger number than the REAL geometric return of 65%. (Oops just gave that one away.)