If returns on stock A are more volatile than the returns on stock B,the geometric average return of stock A is ________ the geometric average return of stock B when their arithmetic average return is the same.

Question

Quizplus · Accepted Answer

The geometric average return takes into account the compounding effect of returns over time. If stock A has more volatility, it means it has a higher standard deviation of returns, which results in larger fluctuations in returns over time. This implies that the compounding effect of returns over time for stock A may be lower than stock B, even if their arithmetic returns are the same. Therefore, the geometric average return of stock A is expected to be lower than the geometric average return of stock B when their arithmetic average returns are the same.

If Returns on Stock a Are More Volatile Than the Returns