Asked by Chelsea Valencia on Apr 28, 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 determined from the information given.
Geometric Average Return
The average rate of return on an investment per year, compounded annually, over a specified time period.
Arithmetic Return
The simple average of a series of returns generated over a period of time.
- Understand the differences between geometric and arithmetic average returns and their applications in performance evaluation.
Verified Answer
SG
sophiya gurungMay 01, 2024
Final Answer :
C
Explanation :
The geometric mean will always be less than the arithmetic mean unless the returns in all periods are equal.
Learning Objectives
- Understand the differences between geometric and arithmetic average returns and their applications in performance evaluation.
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