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Cfa Quan - 4

The geometric mean return value of a volatile stock is likely to be lower than the arithmetic mean return value due to significant variations in returns. The arithmetic mean can overstate actual performance by not accounting for compounding effects, especially in volatile scenarios. The geometric mean, on the other hand, provides a more accurate and conservative measure of average return by considering the compounding effect and sequence of returns.

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4 views1 page

Cfa Quan - 4

The geometric mean return value of a volatile stock is likely to be lower than the arithmetic mean return value due to significant variations in returns. The arithmetic mean can overstate actual performance by not accounting for compounding effects, especially in volatile scenarios. The geometric mean, on the other hand, provides a more accurate and conservative measure of average return by considering the compounding effect and sequence of returns.

Uploaded by

ahmadslim79
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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n investor holds a stock that has been quite volatile over the past few years.

The
geometric mean return value will most likely be:
A. Higher than the arithmetic mean return value.
B. Lower than the arithmetic mean return value.
C. The same as the arithmetic mean return value.
The correct answer is B.
The geometric mean return value will be less than the arithmetic mean return value
if the returns have varied significantly from year to year. This is because the
arithmetic mean tends to overstate the actual average return by a greater and
greater amount the more the inputs vary.
A is incorrect.
The arithmetic mean simply calculates the average of returns without considering
the compounding effect, which can lead to an overestimation of the actual
performance of an investment. In scenarios where there is significant volatility, the
arithmetic mean does not accurately reflect the impact of negative returns, which
can be mitigated in the geometric mean through its multiplicative process.
C is incorrect.
The geometric mean accounts for the compounding effect and the sequence of
returns, which can significantly affect the investment's growth over time. Therefore,
for volatile investments, the geometric mean provides a more accurate and often
more conservative measure of average return.

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