Question

1. A stock produced total returns of 15%, 12%, -20%, and 36% over the past four years, respectively. What is the geometric average return? Select one: a. 6.30% b. 7.60% c. 5.83% d. 2.44% e. 2.04%

2. A project costs $500 and has cash flows of $110 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?

Select one:

a. 5.27 years

b. 5.33 years

c. 5.00 years

d. The project never pays back

e. 4.75 years

Answer 1

1.

Geometric Average Return = {(1+r1)*(1+r2)*(1+r3)*(1+r4) }^(1/4) -1

= {(1+0.15)*(1+0.12)*(1-0.20)*(1+0.36)}^(1/4) - 1

= 8.80 % Answer

I think there is some problem with options.

2.

Year Cashflow Cumulative

0 -500 -500

1 110 -390

2 110 -280

3 110 -170

4 75 -95

5 75 -20

After 5 years we are yet to recover cost of 20.

In year 6 we will get a cash flow of 75 -> it will take 20/75 = 0.27 year

Payback Period = 5.27 Years

Option A is correct.

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