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Cfa Quan - 3

The geometric mean return for a 3-year fund with returns of -3%, 6%, and 8% is calculated to be approximately 3.55%. Options B and C are incorrect as they either overestimate or underestimate the compounded effect of the returns. The geometric mean effectively accounts for the sequence of returns, particularly the impact of the initial negative return followed by positive growth.

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7 views1 page

Cfa Quan - 3

The geometric mean return for a 3-year fund with returns of -3%, 6%, and 8% is calculated to be approximately 3.55%. Options B and C are incorrect as they either overestimate or underestimate the compounded effect of the returns. The geometric mean effectively accounts for the sequence of returns, particularly the impact of the initial negative return followed by positive growth.

Uploaded by

ahmadslim79
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© © All Rights Reserved
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A 3-year fund returned -3%, 6% and 8% respectively.

The geometric mean for this


fund is closest to: A. 3.55%.
B. 4%.
C. 2.78%.
The correct answer is A.
Geometric mean =((0.97)(1.06)(1.08))(1/3) − 1 = 3.55%
B is incorrect.
It suggests the geometric mean is 4%, which overestimates the compounded effect
of the given returns. The calculation of the geometric mean takes into account the
negative return in the first year, which impacts the overall growth rate of the
investment.
C is incorrect.
It suggests the geometric mean is 2.78%, which underestimates the compounded
growth of the investment. This might result from a miscalculation or
misunderstanding of how the geometric mean accounts for the sequence of returns,
especially the recovery and growth in the subsequent years after a negative return.
The geometric mean accurately reflects the rate at which the investment has grown
on average per year, taking into account the effect of compounding, which is not as
low as 2.78% in this case.

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