La Maudite Ltd.'s annual returns for the past five years were: 11.5%, 18%, -12%, -16.5%, and 28%.What are the arithmetic and geometric average annual returns for La Maudite over the five-year period?
A)Arithmetic mean = 5.80%; geometric mean = 4.35%
B)Arithmetic mean = 4.35%; geometric mean = 5.80%
C)Arithmetic mean = 17.20%; geometric mean = 17.05%
D)Arithmetic mean = 17.05%; geometric mean = 17.20%

Question

Quizplus · Accepted Answer

The arithmetic mean is calculated by summing the annual returns and dividing by the number of years: (11.5% + 18% - 12% - 16.5% + 28%) / 5 = 5.80%. The geometric mean is calculated by multiplying the returns (as a decimal plus one), taking the nth root (where n is the number of years), and subtracting one: [(1.115) * (1.18) * (0.88) * (0.835) * (1.28)]^(1/5) - 1 ≈ 4.35%.