A mutual fund reported the following quarterly returns: 2%, -5%, 4%, 1%. To the nearest tenth of a percent, this represents an annual return of
A)3.0%.
B)1.8%.
C)2.0%.
D)1.2%.

Question

Quizplus · Accepted Answer

To find the annual return, we need to compound the quarterly returns. One way to do this is to use the following formula:

(1 + r1)(1 + r2)(1 + r3)(1 + r4) - 1

where r1 through r4 are the quarterly returns as decimals. Applying this formula to the given returns yields:

(1 + 0.02)(1 - 0.05)(1 + 0.04)(1 + 0.01) - 1 = 0.018

Multiplying by 100 to convert to a percentage gives 1.8%. Therefore, the best choice is B.

A Mutual Fund Reported the Following Quarterly Returns: 2%, -5