Question

A stock produced total returns of 10%, 12%, 20%, and -36% over the past four years, respectively. What is the average rate of return for this period of time? What is the geometric average return?

Answer 1

1)

Average return = (0.1 + 0.12 + 0.2 - 0.36) / 4

Average return = 0.015 or 1.50%

2)

geometric average return = [(1 + 0.1)(1 + 0.12)(1 + 0.2)(1 - 0.36)]^1/4 - 1

geometric average return = [1.1 * 1.12 * 1.2 * 0.64]^1/4 - 1

geometric average return = 0.9863 - 1

geometric average return = -0.0137 or -1.37%