NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
A portfolio has returned 8%, 12% and -4% in three successive years. Which is the correct approximate arithmetic mean annual return?
The arithmetic mean annual return is 5.33%. Add the three yearly returns, 8, 12 and minus 4, to get 16, then divide by the three years. This simple average does not account for compounding.
- A5.33%Correct
- B8.00%
- C6.00%
- D4.00%
Explanation
Arithmetic mean = (8 + 12 - 4) / 3 = 16/3 = 5.33%. Dividing by 2 instead of 3 would give 8%, a mistake in the number of periods. Adding without the negative sign gives 16/3 = 5.33 only when -4 is subtracted, so the sign must be kept.
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