The geometric average annual return for a large capitalization stock portfolio is 12% for ten years and 5% per year for the next five years.The geometric average annual return for the entire 15-year period is:
A)9.95%
B)9.62%
C)9.11%
D)10.23%
E)10.97%

Question

Quizplus · Accepted Answer

Using the formula for geometric mean, we have:

(1 + 0.12)^10 * (1 + 0.05)^5 = (1 + g)^15

Solving for g, we get:

g = [(1 + 0.12)^10 * (1 + 0.05)^5]^(1/15) - 1 = 0.0962 or 9.62%

Therefore, the answer is B, with a geometric average annual return of 9.62% for the entire 15-year period.

The Geometric Average Annual Return for a Large Capitalization Stock