The geometric return on an investment is approximately equal to the arithmetic return:
A)plus half the standard deviation.
B)plus half the variance.
C)minus half the standard deviation.
D)minus half the variance.
E)divided by two.

Question

Quizplus · Accepted Answer

The geometric return on an investment is approximately equal to the arithmetic return minus half the variance. This is because the geometric return accounts for the compounding effect over time, which is not captured by the arithmetic return. The variance, which measures the dispersion of returns, affects the geometric return by reducing it, hence the subtraction of half the variance.

The Geometric Return on an Investment Is Approximately Equal to the Arithmetic