Historically,the average arithmetic return of Parametric Design Company has been 12%.If the returns have been normally distributed with a variance of 6%,the geometric average return on this stock has been _________.

Question

Quizplus · Accepted Answer

The formula to calculate the geometric average return is:

Geometric average return = [(1 + arithmetic average return)/(1 + variance of returns)^(1/2)] - 1

Substituting the values given in the question:

Geometric average return = [(1 + 0.12)/(1 + 0.06)^(1/2)] - 1

Geometric average return = 9%

Therefore, the best choice is D, which is 9%.

Historically,the Average Arithmetic Return of Parametric Design Company Has Been