CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
An analyst wants to describe the single constant annual rate at which an investment grew over several years of varying returns. Which measure is most appropriate?
The geometric mean return is most appropriate, because it is the constant annual compound rate that links the beginning value to the ending value over multiple periods. The arithmetic mean instead estimates expected return for a single period.
- AGeometric mean returnCorrect
- BArithmetic mean return
- CMoney-weighted return divided by years
Explanation
The geometric mean return is the constant compound rate that produces the same ending value from the same starting value. The arithmetic mean estimates a single-period expected return, not compound growth. Dividing a money-weighted return by years is not a valid measure.
Did you get it right without looking?
One question tells you little. A timed set on Returns of Financial Assets and Instruments shows your real accuracy, how long you take and where you lose marks.
More Returns of Financial Assets and Instruments questions
- An investment consultant wants to compare the skill of several portfolio managers whose clients decide when to add or withdraw money. Which …
- A fund manager reports a return calculated after deducting trading commissions and bid-ask spread costs but before deducting the management …
- An investor buys a share for $40.00, receives a dividend of $1.20 during the year, and sells the share at year-end for $43.60. The holding p…
- Compared with an unleveraged position in the same asset, the use of borrowed funds at an interest rate below the asset's return is most like…
- An investor buys a share at 50 at time 0. At the end of Year 1 the price is 60 and she buys one more share. At the end of Year 2 the price i…
- A fund earned a high return in a period when it held little capital and a poor return in a period when it held much more capital after large…