CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
A fund reports annual returns of +20%, −10% and +15% over three years. The geometric mean annual return is closest to:
Compounding the three growth factors gives 1.242, and its cube root is about 1.075, a geometric mean near 7.5%. The arithmetic mean of 8.3% overstates the compound growth rate.
- A6.5%Correct
- B8.3%
- C8.4%
Explanation
Product = 1.20 × 0.90 × 1.15 = 1.242. Cube root of 1.242 ≈ 1.0752, so about 7.5%. Check: 1.075^3 = 1.2423. The arithmetic mean is 8.33%, which is the 8.3% distractor. None of the options matches 7.5% exactly, so the closest must be judged: 6.5% differs by 1.0, 8.3% by 0.8.
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