The geometric average rate of return on three one-year returns of 9%, 4%, and 7% is:
A) 6.67%
B) 20%
C) 6.65%
D) 7%

Question

Quizplus · Accepted Answer

The geometric average rate of return is calculated by finding the nth root of the product of the returns (expressed as decimals plus one), where n is the number of returns, and then subtracting one and converting back to a percentage. For these returns, it's the cube root of (1.09 * 1.04 * 1.07) - 1, which equals approximately 0.0665 or 6.65%.

The Geometric Average Rate of Return on Three One-Year Returns