Question

You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. Year Beginning of Year Price # of Shares Bought or Sold 2014 $110 270 bought 2015 $115 220 bought 2016 $111 245 sold 2017 $114 245 sold

Year 2014 Beginning of Year Price $110 $115 $111 $114 # of Shares Bought or Sold 270 bought 220 bought 245 sold 245 sold 2015 2016 2017

What is the geometric average return for the period?

Answer 1

Geometric Average Return (g) = 1.2%. Beginnin Bought/Sold g Price 2014 110 270 bought 2015 115 220 bought Calculation of Return Return (115-110/110 0.045 (111 - 115/115 (0.035) 2016 2017 111 245 sold 114 245 sold (114-111)/111 0.027 Geometric Average Return (n) = [(1+r) (1+r2) ... (1+r.)]/n - 1 where, r; = return over the period i (i = 1,2,...n) n = number of periods. 8. = [(1+0.045) (1+(-0.035)) (1+0.027)]1/3 - 1 = (1.036]1/3 - 1 1.012-1 0.012 Geometric Average Return (g) = 1.2%.