NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
A portfolio has annual returns of 20% in year 1 and -10% in year 2. What is its compound annual growth rate (geometric mean return) closest to?
The compound annual growth rate is about 3.9%. Multiplying the growth factors 1.20 and 0.90 gives 1.08 over two years, and its square root is roughly 1.039. The simple average of 5 percent overstates the return because it ignores compounding and volatility.
- A5.0%
- B10.0%
- C3.9%Correct
- D8.0%
Explanation
Growth factors are 1.20 and 0.90, product = 1.08. The square root of 1.08 is about 1.0392, so CAGR is about 3.9%. The arithmetic mean of 5% overstates the compounded return.
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