An investment had the following 4 year returns: -8%, 15%, 10% and -5%. Determine the average annual rate of return.
A) 2.54%
B) 3.61%
C) 3.85%
D) 4.03%
E) 4.92%

Question

Quizplus · Accepted Answer

To find the average annual rate of return, you first calculate the overall return over the 4 years using the formula for compound interest: (1 - 0.08) * (1 + 0.15) * (1 + 0.10) * (1 - 0.05) = 1.1022. This means the investment grew by 10.22% over 4 years. To find the average annual rate, you take the fourth root of 1.1022 (since there are 4 years) and subtract 1, then convert to a percentage. The fourth root of 1.1022 is approximately 1.0246, which means the average annual rate of return is approximately 2.46%. The closest answer provided is 2.54%, so there was a slight rounding difference in the calculation.

An Investment Had the Following 4 Year Returns: -8%, 15