You've observed the following returns on Bama computer stock over the past five years: 21 percent, 9 percent, -16 percent, 10 percent, and 3 percent

Finance Mar 07, 2021

You've observed the following returns on Bama computer stock over the past five years: 21 percent, 9 percent, -16 percent, 10 percent, and 3 percent. What is the geometric return over this period?

Expert Solution

Computation of Geometric Average Return:

Geometric Average Return = [(1 + R1) * (1 + R2) * ... * (1 + RT)]^1/T - 1

=[(1 +21%)(1 + 9%)(1 + (-16%))(1 + 10%)(1 + 3%)^(1/5) - 1

= 1.2552^(1/5) -1

= 1.0465 - 1

Geometric Average Return = 0.0465 or 4.65%

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