Suppose a portfolio had an arithmetic average return of 8 percent for a 4-year period.Which one of these statements must be true regarding this portfolio for the period?
A)At least one of the 4 years produced an annual rate of return of 8 percent.
B)If the standard deviation of the portfolio is greater than zero,then the geometric average portfolio return is less than 8 percent.
C)The standard deviation of the portfolio must be lower than the standard deviation of a comparable portfolio that had an arithmetic average return of 9 percent.
D)If the standard deviation of the portfolio is zero,then the geometric average return must also be zero.
E)The holding period return must be less than 8 percent.

Question

Quizplus · Accepted Answer

The geometric average return accounts for the compounding effect and will be less than the arithmetic average return if there is any volatility (i.e., if the standard deviation is greater than zero).

Suppose a Portfolio Had an Arithmetic Average Return of 8