NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
A stock's returns over five years were 10%, 20%, -10%, 15% and 5%. What is the arithmetic mean annual return?
The arithmetic mean return is 8%. Add the five yearly returns (10, 20, -10, 15 and 5) to get 40 and divide by five years. The negative year must be included with its sign, otherwise the average is overstated.
- A8%Correct
- B10%
- C12%
- D6%
Explanation
Sum = 10+20-10+15+5 = 40. Dividing by 5 gives 8%. Dividing by a wrong count or ignoring the negative year gives 10% or 12%, which is wrong.
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