Suppose a particular investment earns an arithmetic return of 10% in year 1, 20% in year 2, and 30% in year 3. The geometric average return for the period will be
A) greater than the arithmetic average return.
B) equal to the arithmetic average return.
C) less than the arithmetic average return.
D) equal to the market return.
E) It cannot be determind from the information given.

Question

Quizplus · Accepted Answer

The geometric average return accounts for the compounding effect over time, which is typically less than the arithmetic average when returns vary, as in this case.

Suppose a Particular Investment Earns an Arithmetic Return of 10