Asked by Egypt Falaah on May 04, 2024
Verified
Suppose a particular investment earns an arithmetic return of 10% in year 1, 20% in year 2, and 30% in year 3. The geometric average return for the period will be
A) greater than the arithmetic average return.
B) equal to the arithmetic average return.
C) less than the arithmetic average return.
D) equal to the market return.
E) It cannot be determind from the information given.
Geometric Average Return
Is the average rate of return of a set of values calculated using the products of the terms.
Arithmetic Return
The simple average of periodic returns of an investment over a specified time frame.
- Compute the arithmetic and geometric mean returns.
Verified Answer
ZK
Zybrea KnightMay 05, 2024
Final Answer :
C
Explanation :
The geometric average return accounts for the compounding effect over time, which is typically less than the arithmetic average when returns vary, as in this case.
Learning Objectives
- Compute the arithmetic and geometric mean returns.
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