NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
A portfolio has the following annual returns over three years: +50%, -20%, +10%. What is the approximate geometric mean annual return?
The geometric mean return is about 9.7 percent, so the closest option is 10 percent. Multiply growth factors 1.5, 0.8 and 1.1 to get 1.32, then take the cube root, about 1.097. The arithmetic mean of 13.3% overstates the compounded return.
- A13.3%
- B10.0%
- C14.5%
- D8.7%Correct
Explanation
Growth factors multiply: 1.5 x 0.8 x 1.1 = 1.32. Cube root of 1.32 is about 1.0968, so about 9.7%. Check against options: 8.7% is nearest only if recomputed... recompute: 1.0968 gives 9.7%, so closest listed option is 10.0%.
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