Question

What are the arithmetic and geometric average returns for a stock with annual returns of:__________.

a) 4%,
b) 9%,
c) -6%,
d) 18%

Answer 1

Arithmetic average return = 6.25%

Geometric average return = 5.89%

Step-by-step explanation:

Annual returns of 4%, 9%, -6% and 18%

Arithmetic average return of the stock = ∑ 4%,9%,-6%,and 18% / n

= 25%/4

= 6.25%

Geometric average return formula = x1,*x2*x3 .....^1/n - 1

Geometric average return = 1.04*1.09*(1-0.06)*1.18^1/4 -1

Geometric average return = 1.04*1.09*0.94*1.18^1/4 - 1

Geometric average return = 1.25789^1/4-1

Geometric average return = 1.0589 - 1

Geometric average return = 0.0589

Geometric average return = 5.89%