Suppose that an investment gave a realised return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is

Question

Quizplus · Accepted Answer

The first step is to calculate the total return over the three-year period:
(1 + 0.2) x (1 + 0.2) x (1 + 0.1) = 1.464
Then we calculate the geometric average by taking the cube root of this total return and subtracting 1:
(1.464)^(1/3) - 1 = 0.1655 or 16.55% (rounded to two decimal places)
Therefore, the answer is choice B.

Suppose That an Investment Gave a Realised Return of 20