Question

A stock has annual returns of 5 percent, 21 percent, −12 percent, 7 percent, and 6 percent for the past five years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent. Multiple Choice 5.80; 4.86 5.80; 5.03 5.62; 5.03 5.40; 5.03 5.40; 4.86

Answer 1

Answer:

5.40; 4.86

Explanation:

arithmetic: will be the sum of rates and divide by the number of elements

5 elements:

(0.05 + 0.21 + (-0.12) + 0.07 + 0.06 ) / 5 = 0,054 = 5.4%

the geometric will be the multiplication of the rate coefficient and the calcualte the root for the number of elements.

1.05 x 1.21 x .88 x 1.07 x 1.06 = 1,26808096

now we do fifth root as there was 5 element: 1.048647187

the geometric rate will be 4.86%