CFA Level I · CFA Level I Exam · Statistical Characteristics of Asset Returns
An analyst wants a single measure of the typical annual growth of an investment whose value compounds over several years with varying returns. Which measure of central tendency is most appropriate?
The geometric mean return is most appropriate because it measures the compound growth rate of an investment across periods with varying returns. The arithmetic mean ignores compounding and overstates growth when returns vary, while the median only reflects the middle observation.
- AMedian return
- BGeometric mean returnCorrect
- CArithmetic mean return
Explanation
The geometric mean captures compound growth over multiple periods because it links returns multiplicatively. The arithmetic mean overstates compound growth when returns vary, and the median ignores the magnitude of the returns.
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