A stock has had returns of 8 percent, 26 percent, 14 percent, −17 percent, 31 percent, and −1 percent over the last six years

Business Jun 02, 2021

A stock has had returns of 8 percent, 26 percent, 14 percent, −17 percent, 31 percent, and −1 percent over the last six years. What are the arithmetic and geometric average returns for the stock?

Expert Solution

Answer:

arithmetic return=Total return/Total time period

=(8+26+14-17+31-1)/6=10.167%(Approx).

geometric average return=[(1+rate1)(1+rate2).......(1+rate6)]^(1/6)-1

=[(1+0.08)(1+0.26)(1+0.14)(1-0.17)(1+0.31)(1-0.01)]^(1/6)-1

8.92%(Approx).

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