A stock had returns of 11 percent, 15 percent, 20 percent, -1 percent, 12 percent, and 14 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?
a.arithmetic return=Total return/Total time period
=(11+15+20-1+12+14)/6=11.83%(Approx).
b.geometric return=[(1+rate 1)(1+rate 2)..............(1+rate 6)]^(1/6)-1
=[(1+0.11)(1+0.15)(1+0.2)(1-0.01)(1+0.12)(1+0.14)]^(1/6)-1
=11.64%(Approx).
A stock had returns of 11 percent, 15 percent, 20 percent, -1 percent, 12 percent, and 14 percent over the last six year...
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