Question

Use the following data for the next 2 questions: You purchased a stock on 1/1/20X1 for $100. The following table gives the price of the stock and the dividend paid for several years. Date Price Dividend 1/1/20X2 110 2 1/1/20X3 105 3 1/1/20X4 130 4 11.

Date	Price	Dividend
1/1/20X2	110	2
1/1/20X3	105	3
1/1/20X4	130	4

What is the arithmetic average annual return over the three-year period for the stock?

What is the geometric average annual return over the three-year period for the stock?

Answer 1

* Arithmetic Average = (Ending price + Dividend - Beginning Price) / Beginning price

* geometric average = ((1 + year 1 return) * (1 + year 2 return) *(1 + year 3 return))^(1/3) - 1