The common stock of Petersen and White Importers yielded returns of 42%, -5%, -18%, 9%, and 12% over the past 5 years, respectively. The arithmetic average return for this period of time is _____% while the geometric average return is _____%.

Question

Quizplus · Accepted Answer

The arithmetic average return is calculated by summing the annual returns and then dividing by the number of years. (42 - 5 - 18 + 9 + 12) / 5 = 8%. The geometric average return, which accounts for compounding, is found by multiplying the returns (as 1 + return), taking the nth root (where n is the number of returns), and then subtracting 1. This gives a geometric average return of approximately 6.19%.

The Common Stock of Petersen and White Importers Yielded Returns