The Value Line Index is an equally-weighted geometric average of the returns of about 1,700 firms. The value of an index based on the geometric average returns of three stocks where the returns on the three stocks during a given period were 32%, 5%, and −10%, respectively, is
A) 4.3%.
B) 7.6%.
C) 9.0%.
D) 13.4%.
E) 5.0%.

Question

Quizplus · Accepted Answer

To find the geometric average return, convert the percentages to decimals and add 1: (1.32), (1.05), and (0.90). Multiply these values: 1.32 * 1.05 * 0.90 = 1.2474. Take the cube root (since there are three stocks): (1.2474)^(1/3) ≈ 1.076. Subtract 1 and convert back to a percentage: 0.076 or 7.6%.

The Value Line Index Is an Equally-Weighted Geometric Average of the Returns