CFA Level I · CFA Level I Exam · Types of Financial Returns
A fund returned +50% in Year 1 and -50% in Year 2. The geometric mean annual return over the two years is closest to:
The geometric mean is about -13.4% per year. Multiply the growth factors 1.50 and 0.50 to get 0.75, take the square root to get 0.866, and subtract one. The arithmetic mean of 0% overstates performance because it ignores compounding.
- A-13.4%Correct
- B0.0%
- C-25.0%
Explanation
Growth factors are 1.50 and 0.50, product 0.75. The square root of 0.75 is 0.8660, so the geometric mean is -13.4%. The arithmetic mean of 0.0% is the distractor that ignores compounding. Check: 0.866^2 = 0.75.
Did you get it right without looking?
One question tells you little. A timed set on Types of Financial Returns shows your real accuracy, how long you take and where you lose marks.
More Types of Financial Returns questions
- An investment rises from 80 to 100 in one year and the next year falls to 90. Compared with the discrete two-year holding period return, the…
- An investment manager has no control over the timing or size of cash contributions and withdrawals made by clients. Which return measure is …
- An analyst compares a nominal return of 6.0% with inflation of 2.5% and a tax rate of 20% applied to the nominal return. Using the conventio…
- A portfolio returns +50% in year one and -50% in year two. An analyst reports the arithmetic mean return and the geometric mean return. The …
- Over three years a portfolio grew from EUR 100,000 to EUR 133,100 with the same return each year. Compared with the geometric mean annual re…
- An investment returns 6.0% over the first year and 8.0% over the second year. The holding period return over the two years is closest to: