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A stock has annual returns of 5.4 percent, 12.9 percent, -3.8 percent, and 9.4 percent for...

A stock has annual returns of 5.4 percent, 12.9 percent, -3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is ________ percent while the geometric average return for the period is ________ percent.

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Answer #1

Let R1 = 5.4%, R2=12.9%, R3=-3.8%, R4=9.4% be the returns of stock over past four years

Arithmetic average of returns = (Sum of returns of past 4 years) / No of years = (R1 + R2 + R3 + R4) / 4 = [5.4% + 12.9% + (-3.8%) + 9.4%] / 4 = [5.4% + 12.9% -3.8% +9.4%] / 4 = 23.90% / 4 = 5.975%

Hence Arithmetic average of returns = 5.975%

Let G = Geometric average of return for the period

G = 1.057868624 - 1 = 0.057868624 = 5.7868624% = 5.79% (rounded to two decimal places)

Geometric Average of returns = 5.7868624% = 5.79% (rounded to two decimal places)

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