You have the returns for a stock over the last twenty years. Assuming the returns are different each year, you know:
A) the arithmetic return will always be larger.
B) the geometric return will always be larger.
C) the arithmetic return will be larger if there are no negative returns.
D) the geometric return will be larger if there are no negative returns.
E) it is uncertain whether the arithmetic or geometric return will be larger.

Question

Quizplus · Accepted Answer

The arithmetic return averages all the annual returns without considering the compounding effect, while the geometric return accounts for the compounding over the period. When returns vary, the arithmetic mean is always higher because it doesn't account for the negative impact of losses or lower returns in the compounding process.

You Have the Returns for a Stock Over the Last