Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?
A) Geometric average
B) Arithmetic average
C) Dollar-weighted
D) Internal

Question

Quizplus · Accepted Answer

The preferred method of constructing returns series for use in evaluating portfolio performance is the geometric average because it accounts for the compounding effect of returns over time. Arithmetic average does not account for compounding and can overstate actual returns. Dollar-weighted and internal methods are used for analyzing the behavior of investors and the performance of investment managers respectively.

Which One of the Following Averaging Methods Is the Preferred