Question

A stock has had the following year-end prices and dividends:
Year Price Dividend
1 $ 43.31 -
2 48.29 $ .51
3 57.21 .54
4 45.29 .60
5 52.21 .65
6 61.29 .73
What are the arithmetic and geometric returns for the stock? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16))

Answer 1

Answer:

Year       Price        Dividend           Return

1             43.31               -                       -

2           48.29           0.51                   12.68%

3            57.21           0.54                  19.59%

4           45.29           0.60                 -19.89%

5           52.21            0.65                  16.71%

6           61.29            0.73                 18.79%

arithmetic returns basically refer to the mean (or average) of the returns = (12.68% + 19.59% - 19.89% + 16.71% + 18.79%) / 5 = 47.88% / 5 = 9.58%

geometric returns involves multiplying the returns and then squaring them = ⁵√(1.1268 x 1.1959 x 0.8011 x 1.1671 x 1.1879) - 1 = 1.0840 - 1 = 0.084 = 8.40%