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 geometric average return is calculated using the formula for the geometric mean of the growth factors of the investment over the period. The growth factors for each year are: Year 1: $100/$80 = 1.25, Year 2: $120/$100 = 1.2, Year 3: $150/$120 = 1.25, Year 4: $100/$150 = 0.6667. The geometric mean is the fourth root of the product of these factors: (1.25 * 1.2 * 1.25 * 0.6667)^(1/4) - 1, which equals approximately 0.057 or 5.7%.

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