Question

6. A stock had returns of 11.44 percent, −15.49 percent, 21.81 percent, 26.89 percent, and 10.31 percent over the past five years. What was the geometric average return for this stock?

7.Three months ago, you purchased a stock for $53.21. The stock is currently priced at $56.27. What is the EAR on your investment?

Answer 1

Answer 6.

Geometric Return = [(1+r1) * (1+r2) * (1+r3) * (1+r4) * (1+r5)]^(1/5) - 1
Geometric Return = [(1+0.1144) * (1-0.1549) * (1+0.2181) * (1+0.2689) * (1+0.1031)]^(1/5) - 1
Geometric Return = (1.60574)^(1/5) - 1
Geometric Return = 1.0993 - 1
Geometric Return = 0.0993 or 9.93%

Answer 7.

3-month Return = (Current Price - Purchase Price) / Purchase Price
3-month Return = ($56.27 - $53.21) / $53.21
3-month Return = 0.05751

Effective Annual Rate = (1 + 3-month Return)^4 - 1
Effective Annual Rate = (1 + 0.05751)^4 - 1
Effective Annual Rate = 1.2507 - 1
Effective Annual Rate = 0.2507 or 25.07%

answered by: anonymous