Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80.Abolishing Dividend Corporation pays no dividends.The stock price at the end of year 1 is $100, $120 at the end of year 2, and $150 at the end of year 3.The stock price declines to $100 at the end of year 4, and you sell your 100 shares.For the four years, your geometric average return is

Question

Quizplus · Accepted Answer

The formula for geometric average return is:

[(Ending Value/Beginning Value)^(1/years held) - 1]

Using this formula, we can calculate the annual returns as follows:

Year 1: [(100/80)^(1/1) - 1] = 0.25 or 25%
Year 2: [(120/100)^(1/1) - 1] = 0.2 or 20%
Year 3: [(150/120)^(1/1) - 1] = 0.25 or 25%
Year 4: [(100/150)^(1/1) - 1] = -0.3333 or -33.33%

To calculate the geometric average return, we multiply these annual returns:

[(1 + 0.25) x (1 + 0.2) x (1 + 0.25) x (1 - 0.3333)]^(1/4) - 1

= [1.45^(1/4) - 1] = 0.0571 or 5.7%

Therefore, the correct answer is C) 5.7%.

Suppose You Buy 100 Shares of Abolishing Dividend Corporation at the Beginning