Question

*This problem has two questions and is worth TWO QUESTIONS, so please choose TWO ANSWERS. Use...

*This problem has two questions and is worth TWO QUESTIONS, so please choose TWO ANSWERS.

Use the following information to solve for TWO QUESTIONS BELOW.

Assume you have acquired following returns from your investment portfolio. Use at least 4 decimal places for accurate answer.

RETURN

YEAR 1

8%

YEAR 2

-11%

YEAR 3

25%

YEAR 4

19%

YEAR 5

-3%

QUESTION #1.

  • What is the arithmetic average rate of return?

QUESTION #2.

  • What is the geometric average rate of return ?

QUESTION #1.

11.50%

QUESTION #1.

7.60%

QUESTION #1.

6.76%

QUESTION #1.

10.68%

QUESTION #2.

6.76%

QUESTION #2.

7.60%

QUESTION #2.

5.55%

QUESTION #2.

11.50%
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Homework Answers

Answer #1

Year 1 Return(r1) = 8%

Year 2 Return(r2) = -11%

Year 3 Return(r3) = 25%

Year 4 Return(r4) = 19%

Year 5 Return(r5) = -3%

Q-1) Calculating AVerage Arithmetic rate of return:-

AVerage Arithmetic rate of return = (r1 + r2 + ...+ rn)/n

AVerage Arithmetic rate of return = (8% -11%+25%+19%-3%)/5

Average Arithmetic rate of return = 7.6%

Q-2) Calculating Geometric Average Rate of Return(GARR):-

GARR = 1.0676 -1

GARR = 6.76%

So, the geometric average rate of return is 6.76%

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