Your total return on a certain investment was -25% for a five-year holding period. What was your annualized rate of return, rounded to the nearest tenth of a percent?
A)+9.4%
B)-9.4%
C)-5.0%
D)-5.6%

Question

Quizplus · Accepted Answer

The annualized rate of return can be calculated using the formula for the geometric mean, which in this case is used to find the equivalent annual return that would lead to the same total return over the period. The formula for the annualized return is $(1 + total return)^{1/n} - 1$, where $n$ is the number of years. Plugging in the values, we get $(1 - 0.25)^{1/5} - 1 = (0.75)^{0.2} - 1 \approx -0.056$, or -5.6% when rounded to the nearest tenth of a percent.

Your Total Return on a Certain Investment Was -25% for a Five-Year