Suppose you own two stocks, A and B. In year 1, stock A earns a 2% return and stock B earns a 9% return. In year 2, stock A earns an 18% return and stock B earns an 11% return. __________ has the higher arithmetic average return.
A) Stock A
B) Stock B
C) The two stocks have the same arithmetic average return.
D) At least three periods are needed to calculate the arithmetic average return.

Question

Quizplus · Accepted Answer

The arithmetic average return is the sum of the returns divided by the number of periods. For stock A, the arithmetic average return is (2% + 18%) / 2 = 10%. For stock B, the arithmetic average return is (9% + 11%) / 2 = 10%. Therefore, the two stocks have the same arithmetic average return.

Suppose You Own Two Stocks, a and B