The beginning share price for a security over a three-year period was $50.Subsequent year-end prices were $62,$58 and $64.The arithmetic average annual rate of return and the geometric average annual rate of return for this stock was:
A) 9.30% and 8.58% respectively.
B) 9.30% and 7.89% respectively.
C) 9.30% and 7.03% respectively.
D) 9.30% and 6.37% respectively.

Question

Quizplus · Accepted Answer

The arithmetic average annual rate of return can be calculated as:
(62-50)/50 + (58-62)/62 + (64-58)/58 / 3 = 0.093 or 9.30%
The geometric average annual rate of return can be calculated as:
[(62/50) x (58/62) x (64/58)]^(1/3) - 1 = 0.086 or 8.58%
Therefore, the correct answer is A.

The Beginning Share Price for a Security Over a Three-Year