NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
A portfolio's returns over five years are 10%, 20%, -10%, 15% and 5%. What is its arithmetic mean annual return?
The arithmetic mean return is 8%. Add the five annual returns, which total 40 percentage points, and divide by five years. The negative year must be included with its sign, since leaving it out would overstate the average.
- A8%Correct
- B10%
- C12%
- D40%
Explanation
Sum of returns = 10 + 20 - 10 + 15 + 5 = 40. Dividing by 5 years gives 8%. The figure 40% is the sum, not the mean. Option 10% ignores the negative year's effect, and 12% results from dropping the -10% year (40+10=50/... incorrect base).
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