I was always taught that you measure groups from the closest edge of the circle on the paper ... so if you have five 1/2" circular holes and the farthest apart they are is 1/8", you've got a 1/8" five-shot group.
The following quote from a post in the rifle forum got me thinking about groups and how they are measured. I always thought that groups were measured from the outside edges of the holes. Is there a standard way to measure groups? How do the judges at the national matches measure them?