NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
A portfolio earned +50% in year 1 and -50% in year 2. What is its geometric mean annual return, approximately?
The geometric mean return is about -13.4% a year. Multiply the growth factors 1.5 and 0.5 to get 0.75, take the square root (about 0.866) and subtract one. The arithmetic mean of 0% overstates performance because it ignores compounding.
- A0%
- B-13.40%Correct
- C-25%
- D-50%
Explanation
Growth factors are 1.5 and 0.5, product 0.75. Square root of 0.75 is about 0.866, so the return is about -13.4%. The arithmetic mean of 0% ignores compounding and is wrong.
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