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Normally you can get away with installing software on a computer even if your antivirus is running -- at least with the default settings. However, most software vendors will ask to close all applications and suspend your antivirus application while you are installing their products. You have been lucky enough (tongue-in-cheek) to experience why they make that recommendation.
Without examining all of the settings for AVG, I would venture to say that it is set, on your computer, to examine running applications for viruses. And if advanced heuristics are configured, it is most likely treating the installation as a virus because of the large amount of data that the setup.exe process is copying to your hard drive. So, in a way, it is doing what you want it to do.
In summary, turn off your antivirus software during the installation. After the installation completes, you can turn antivirus scanning back on.
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