You’ve compiled the following annual returns on the stock of
Rumba Corp. over the past 4 years: -10%, 16%, 10%, and 8%.
a. Calculate the arithmetic average return (ra) on the stock over
this 4-year period. b. Calculate the compound or geometric average
return (rg) on the stock over this 4-year period.
a. The arithmetic average return is computed as shown below:
= ( - 10% + 16% + 10% + 8% ) / 4
= 6%
The geometric average return is computed as shown below:
= [ ( 1 - 0.10) x ( 1 + 0.16 ) x (1 + 0.10) x ( 1 + 0.08 ) ] 1 / 4 - 1
= [ 0.90 x 1.16 x 1.10 x 1.08 ]1 / 4 - 1
= 5.53% Approximately
Feel free to ask in case of any query relating to this question
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