CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
An analyst wants a single measure of the compound annual growth experienced by an investor over several years of varying returns. The most appropriate measure is the:
The geometric mean return is most appropriate because it measures the compound annual growth rate of invested wealth across periods with varying returns. The arithmetic mean overstates compound growth when returns are volatile.
- Ageometric mean returnCorrect
- Barithmetic mean return
- Cmoney-weighted average of price returns
Explanation
The geometric mean captures compounding and the actual growth of invested wealth over multiple periods. The arithmetic mean overstates compound growth when returns vary.
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