Your total return on an investment was -12% over an eight-year holding period. What was your annualized rate of return, rounded to the nearest tenth of a percent?
A)-1.6%
B)-9.84%
C)-0.98%
D)-1.5%

Question

Quizplus · Accepted Answer

The annualized rate of return can be calculated using the formula for the geometric mean, which in the context of financial returns is often referred to as the compound annual growth rate (CAGR). The formula for CAGR is: $$CAGR = \left(\frac{Ending\ Value}{Beginning\ Value}\right)^{\frac{1}{n}} - 1$$ where $n$ is the number of periods. In this case, the total return over 8 years was -12%, or a final value of 88% of the original (100% - 12% = 88%). Plugging into the formula gives: $$CAGR = \left(\frac{88}{100}\right)^{\frac{1}{8}} - 1$$ This calculation results in an annualized rate of return of approximately -1.6% when rounded to the nearest tenth of a percent.

Your Total Return on an Investment Was -12% Over an Eight-Year