Use the following information to answer the following question(s).
Susan Bright will get returns of 18%, -20.3%, -14%, 17.6%, and 8.3% in the next five years on her investment in CoffeeTown, Inc. stock, which she purchases for $73,419.66 today.
What is the arithmetic average return on her stock if she sells it five years from today?
A) 1.92%
B) 3.98%
C) 6.47%
D) 7.11%
What is the geometric average return on her stock if she sells it five years from today?
A) -2.33%
B) .59%
C) 3.67%
D) 4.88%
How much will Susan's stock be worth if she sells it five years from today?
A) $71,423.85
B) $73,419.66
C) $75,628.75
D) $80,333.40
Arithmetic average rate of return takes compounding into effect.
Answer: FALSE
An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.
Answer: TRUE
If an investor holds earns 10% on her investment in the first year and loses 10% the next year, she will have neither a gain nor a loss.
Answer: FALSE
If an investor holds a stock for three years, the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return) to the third power.
Answer: FALSE
