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A certain stock had the following returns over the past 4 years: Year 1: -0
A certain stock had the following returns over the past 4 years:
Year 1: -0.18%
Year 2: 14.53%
Year 3: 28.35%
Year 4: 14.98%
Required
Calculate:
a. holding period return
b. geometric average return
c. arithmetic average return
Expert Solution
1) Computation of Holding Period Return:
Holding Period Return = [(1 + R1)(1 + R2)(1 + R3)(1+R4)] - 1
= [(1 + -(0.18%))*(1 + 14.53%)*(1 + 28.35%)*(1+14.98%)] - 1
= 1.6872 - 1
Holding Period Return = 0.6872 or 68.72%
2) Computation of Geometric Average Return:
Geometric Average Return = [(1+r1)(1+r2)....(1+rn)]^(1/n) - 1
= [(1 + -(0.18%))*(1 + 14.53%)*(1 + 28.35%)*(1+14.98%)]^(1/4) -1
= 1.6872^(1/4) - 1
= 1.1397 - 1
Geometric Average Return = 0.1397 or 13.97%
3) Computation of Arithmetic Average Return:
Arithmetic Average Return = (-0.18%+14.53%+28.35%+14.98%)/4 = 14.42%
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