CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
A portfolio returned +50% in Year 1 and −20% in Year 2. The geometric mean annual return is closest to:
The geometric mean return is about 9.5% per year. Multiplying the growth factors 1.50 and 0.80 gives 1.20 over two years, and its square root is about 1.0954. The 15.0% figure is the arithmetic mean, which overstates compound performance.
- A9.5%Correct
- B15.0%
- C30.0%
Explanation
Growth factors: 1.50 × 0.80 = 1.20. Square root = 1.0954, so the geometric mean is about 9.5%. The arithmetic mean is 15.0%, which overstates the compound growth rate.
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