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,the price $120 at the end of year 2,and the price is $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

First, we need to calculate the annual percentage returns for each year:
Year 1: (100-80)/80 = 25%
Year 2: (120-100)/100 = 20%
Year 3: (150-120)/120 = 25%
Year 4: (100-150)/150 = -33.3%

To calculate the geometric average return, we use the following formula:
(1 + R1) x (1 + R2) x (1 + R3) x (1 + R4) ^ (1/4) - 1
where R1 is the return for year 1, R2 is the return for year 2, and so on.

Plugging in the annual returns, we get:
(1 + 0.25) x (1 + 0.20) x (1 + 0.25) x (1 - 0.333) ^ (1/4) - 1
= 1.197625 - 1
= 0.197625

So, the geometric average return is 19.76%, which when rounded to one decimal place, gives us 5.7%, option C.

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