Suppose that an investment gave a realised return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is
A)9.70%.
B)14.96%.
C)16.55%.
D)11.20%.

Question

Quizplus · Accepted Answer

The formula for geometric average return is:
(1+R1) x (1+R2) x ... x (1+Rn)^(1/n) - 1
where R1, R2, ..., Rn are the annual returns for each year.
Using the formula, we get:
(1.20) x (1.20) x (1.10)^(1/3) - 1 = 0.1655 or 16.55%
Therefore, the correct answer is C.

Suppose That an Investment Gave a Realised Return of 20