Question

Given that the annual returns on your $10,000 investment in your favorite stock were -16%, 4%,...

Given that the annual returns on your $10,000 investment in your favorite stock were -16%, 4%, 10%, and 18%,respectively, over the last four years, calculate (i) your buy-and-hold investment strategy's average annual return over the 4-year holding horizon, and (ii) the value of your investment at the end of Year 3 during the 4-year holding horizon, respectively.

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Homework Answers

Answer #1

Average annual return of an investment is calculable by using the mathematical relation of geometric mean return.

Part (i)

Using the geometric mean formula above,

GM = 3.19% --> This means on an average, the investment earns 3.19% annually.

Part (ii)

Value of Investment at end of 3 YR = $10,000 * (1 - 16%) * (1 + 4%) * (1 + 10%)

Value of Investment at end of 3 YR = $10,000 * 0.84 * 1.04 * 1.1 = $9,609.60

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