Question

A stock had returns of 14 percent, 11 percent, 19 percent, 20 percent, 13 percent, and...

A stock had returns of 14 percent, 11 percent, 19 percent, 20 percent, 13 percent, and -7 percent over the last six years.

  

Required:
(a) What is the arithmetic return for the stock?

  

(b) What is the geometric return for the stock?

   

  

Requirement 3:
If the inflation rate last year was 8 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations.)
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Homework Answers

Answer #1

Answer to Question 1:

Requirement A:

Arithmetic Return = [r1 + r2 + r3 + r4 + r5 + r6] / 6
Arithmetic Return = [0.14 + 0.11 + 0.19 + 0.20 + 0.13 + (-0.07)] / 6
Arithmetic Return = 0.70 / 6
Arithmetic Return = 0.1167 or 11.67%

Requirement B:

Geometric Return = [(1+r1) * (1+r2) * (1+r3) * (1+r4) * (1+r5) * (1+r6)]^(1/6) - 1
Geometric Return = [(1+0.14) * (1+0.11) * (1+0.19) * (1+0.20) * (1+0.13) * (1-0.07)]^(1/6) - 1
Geometric Return = 1.898967^(1/6) - 1
Geometric Return = 1.1128 - 1
Geometric Return = 0.1128 or 11.28%

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