CFA Level I · CFA Level I Exam · Statistical Characteristics of Asset Returns
A portfolio earned returns of +50% in Year 1 and -20% in Year 2. The geometric mean annual return is closest to:
The geometric mean compounds the growth factors: 1.50 times 0.80 equals 1.20, and its square root is about 1.0954, so the annual return is roughly 9.5%. The 15% arithmetic mean overstates the true compound rate because returns vary.
- A9.5%Correct
- B15.0%
- C30.0%
Explanation
Growth factors are 1.50 and 0.80; product = 1.20. Square root of 1.20 = 1.0954, so the geometric mean is 9.5%. The arithmetic mean of 15% overstates the compound growth rate.
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