Question

for arithmetic mean return and the geometric mean return

Which statistic would be more appropriate for conveying the typical returns generated by the investment in each period of the observed history? Explain

Which statistic would be more appropriate for forming expectations about the expected return of the investment in the coming year? Explain

Answer #1

The most important and popular type of average is arithmetic mean return .The arithmetic mean is calculated by sum of all the items and by divide with total number of items. The arithmetic mean can calculated various series like individual series,discrete series and continuos series. The arithmetic mean return is more appropriate for conveying the returns from investment in each period.

The more appropriate for forming expectations in the expected return of the investment in the coming year can calculated through geometric mean return. Geometric mean is total number of items root of the of that items.that means if having 'x' number of items then we calculate the geometric mean return by use of x root of the product of x items..here we calculate the expected or possible outcome or return that is well explained and calculated through geometric mean return.

Consider the following five monthly returns. The arithmetic
average monthly return over this period is 1.40% and the geometric
average monthly return over this period is 1.33%. Explain the
difference between the arithmetic average return and the geometric
average return. Are both numbers useful? If so, explain why?
3% -1% 2% 7% -4%
Choose the correct answer below.
Both numbers are useful. The geometric average return tells you
what you would actually make if you held the stock over this...

You plan to analyze the value of a potential 5-year investment
in which you expect to earn a positive return every year. However,
the yearly rate of return differs every year. Which of the
following is true?
The holding period return is best for comparison to other
investments.
The geometric mean return will be larger than the arithmetic
average return.
The holding period return is the same as the arithmetic average
return.
The arithmetic average return will be larger than...

2. Which one of the followings is not related to
Geometric Return or Mean?
A. The longer the time horizon, the more critical compounding
becomes and the more appropriate the use of geometric mean.
B. The main benefit of using the geometric mean is the actual
amounts invested do not need to be known.
C. The geometric mean is the average rate of return of a set of
values calculated using the products of the terms.
D. The geometric mean...

5. Consider the rate of return of stocks ABC and XYZ.
Year
rABC
rXYZ
1
20%
30%
2
12
12
3
14
18
4
3
0
5
1
−10
a. Calculate the arithmetic average return on these stocks over
the sample period.
b. Which stock has greater dispersion around the mean
return?
c. Calculate the geometric average returns of each stock. What
do you conclude?
d. If you...

1. Which one of the followings is not related to Holding
Period Return (HPR)?
A. Holding period return (or yield) is the total return earned
on an investment during the time that it has been held.
B. A holding period is the amount of time the investment is held
by an investor, or the period between the purchase and sale of a
security.
C. Holding period return is the average rate of return of a set
of values calculated using...

1.‘The rate of return is more appropriate for comparing the
profitability of financial assets than absolute dollar profit.’ Do
you agree with this statement?Explain.
2.‘The rate of return is the most important outcome for an
investment.’ Do you agree with this statement?Explain.
3.Explain how the expected rate of return and the risk of an
individual asset are measured.
4.Explain how the expected rate of returnand the variance of a
portfolio are calculated.
5.Explain what ‘covariance’ means.
6.Explain how the number...

As a portfolio manager for an insurance company, you are about
to invest funds in one of three possible investments: (1) 10-year
coupon bonds issued by the U.S. Treasury, (2) 20-year zero-coupon
bonds issued by the Treasury, or (3) one-year Treasury securities.
Each possible investment is perceived to have no risk of default.
You plan to maintain this investment for a one-year period. The
return of each investment over a one-year horizon would be about
the same if interest rates...

Corry did research to show stock return patterns. As he would
expect, stocks with large positive earnings (winners) experience a
positive return on the announcement day while stocks with large
negative earnings surprises (losers) earn negative returns on the
announcement day. More surprisingly, within the 20-day period prior
to the earnings announcements, prices of winner stocks tend to go
up while loser stocks experience negative returns. There is no
evidence of changes in analyst expectations prior to the
announcement, and...

You are the CFO of a beer and wine distribution company, B&W
Company, which is planning to expand into Florida. The Board has
asked you to do an analysis of the expected return on a new
warehouse and related equipment required for the expansion. The new
warehouse would be more efficient and could handle the volume
anticipated in the new territory. The project would require an
initial investment of $20 million with an add-on investment of $5
million at the...

You have been given the following return data, three assets
A,B, and C over the period 2021-2024
Expected Return
Year Asset A Asset B Asset
C
2021 8%
11% 5%
2022 10%
9% 7%
2023 12%
7%
9%
2024 14%
5%
11%
Using these assets, you have isolated three investment
alternatives:
Alternative Investment
1 100% of asset A
2 45% of asset A and
55% of asset B...

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