You have owned a stock for seven years. The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly. Given this, you know the arithmetic average return for the period is:
A)positive but less than the geometric average return.
B)less than the geometric return and could be negative, zero, or positive.
C)equal to the geometric average return.
D)either equal to or greater than the geometric average return.
E)greater than the geometric average return.

Question

Quizplus · Accepted Answer

The arithmetic average return is typically greater than the geometric average return when there are significant variations in the annual rates of return. The geometric average accounts for the compounding effect over time, which can be lower than the arithmetic average that simply sums up the annual returns and divides by the number of periods.

You Have Owned a Stock for Seven Years