The return pattern on your favorite stock has been 5.39 percent,8.26 percent,−12.04 percent,and 14.27 percent over the last four years.What are the average arithmetic and geometric rates of return?
A)3.45 percent; 3.21 percent
B)3.97 percent; 3.48 percent
C)3.88 percent; 3.64 percent
D)3.92 percent; 3.56 percent
E)3.51 percent; 3.26 percent

Question

Quizplus · Accepted Answer

The average arithmetic return is calculated by summing the individual yearly returns and dividing by the number of years. The average geometric return is calculated by finding the product of (1 + each year's return), taking the nth root (where n is the number of years), and subtracting 1. For the given returns: Arithmetic mean = (5.39 + 8.26 - 12.04 + 14.27) / 4 = 3.97 percent. Geometric mean = [(1.0539) * (1.0826) * (0.8796) * (1.1427)]^(1/4) - 1 = 3.48 percent.

The Return Pattern on Your Favorite Stock Has Been 5