Which of the following statements is TRUE?
A)The geometric mean measures the average annual rates of return while the arithmetic mean measures the compound growth rate over multiple time periods.
B)The more the returns vary, the bigger the difference between the arithmetic and geometric mean will be.The difference is dependent on the relevant investment horizon.
C)The geometric mean is appropriate when we are trying to estimate the typical return for a given period.
D)The arithmetic mean is a better average return estimate when we are interested in the rate of return performance of an investment over time.

Question

Quizplus · Accepted Answer

B) is true because the geometric mean is less than the arithmetic mean when there is variability in the rates of return, reflecting the compounding effect over time. The difference between them increases with the volatility of the returns, not the investment horizon.

Which of the Following Statements Is TRUE