Baxter Inc.'s annual returns for the past four years were: 2.75%, -1.8%, 7.2%, and 6.5%.What are the arithmetic and geometric average annual returns for Baxter over the four-year period?
A)Arithmetic mean = 6.80%; geometric mean = 3.35%
B)Arithmetic mean = 3.66%; geometric mean = 3.60%
C)Arithmetic mean = 14.65%; geometric mean = 10.05%
D)Arithmetic mean = 18.03%; geometric mean = 21.20%

Question

Quizplus · Accepted Answer

The arithmetic mean is calculated by adding all the annual returns and dividing by the number of years: (2.75% - 1.8% + 7.2% + 6.5%) / 4 = 3.66%. The geometric mean is calculated by multiplying all the (1 + return) values together, taking the nth root (where n is the number of years), and subtracting 1: [(1.0275) * (0.982) * (1.072) * (1.065)]^(1/4) - 1 ≈ 3.60%.