What are the arithmetic and geometric average returns (Answer in that order.)for a stock with annual returns of 4 percent,9 percent,−6 percent,and 18 percent?
A)5.89 percent; 6.25 percent
B)6.25 percent; 5.89 percent
C)6.25 percent; 8.33 percent
D)8.33 percent; 5.89 percent
E)8.33 percent; 8.33 percent

Question

Quizplus · Accepted Answer

Arithmetic average return = (4 + 9 - 6 + 18)/4 = 6.25%
Geometric average return = [(1.04)(1.09)(0.94)(1.18)]^(1/4) - 1 = 5.89%
Therefore, the correct option is B, as the arithmetic average return is 6.25% and the geometric average return is 5.89%.

What Are the Arithmetic and Geometric Average Returns (Answer in That