CFA Level I · CFA Level I Exam · Types of Financial Returns
Over three years a portfolio grew from EUR 100,000 to EUR 133,100 with the same return each year. Compared with the geometric mean annual return, the arithmetic mean annual return is most likely:
The arithmetic mean equals the geometric mean. The portfolio grew by a factor of 1.331, which is 1.10 cubed, so each year returned exactly 10%. With no variation in returns, the two means coincide at 10%.
- Ahigher than the geometric mean.
- Blower than the geometric mean.
- Cequal to the geometric mean.Correct
Explanation
133,100/100,000 = 1.331 = 1.10^3, so each year's return was 10%. When every period's return is identical, the arithmetic and geometric means are equal, both 10%. A gap arises only when returns vary.
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