You own a stock that has produced an arithmetic average return of 8.6 percent over the past five years. The annual returns for the first four years were 16, 11, −19, and 3 percent, respectively. What was the rate of return on the stock in year five?
A)−5.00%
B)2.75%
C)6.25%
D)28.00%
E)32.00%

Question

Quizplus · Accepted Answer

To find the rate of return in the fifth year, we first calculate the total return over the five years using the arithmetic average return of 8.6 percent: 8.6% * 5 = 43%. Then, we sum the returns for the first four years: 16% + 11% - 19% + 3% = 11%. To find the fifth year's return, we subtract the total return of the first four years from the overall five-year return: 43% - 11% = 32%. Therefore, the return in the fifth year is 32%.

You Own a Stock That Has Produced an Arithmetic Average