3. Consider two investments which have each produced returns over a period of seven years. Investment A produced a return of 20% in year one, zero in year two, 20% in year three, zero in year four, 20% in year five, zero in year six, and 12% in year seven. Investment B produced a return of 10% in each year. 3 a. Compute the arithmetic and geometric mean returns for each investment. 3 b. Beginning with $1000, work out what the value of each of the investments would have been after seven years, and determine which was the better invest- ment. 3 c. The two mean-return calculations, arithmetic and geometric, rank the in- vestments differently. Which one of the two correctly reproduces the ranking by total final value? Why does the other mean calculation get it 'wrong'?
3. Consider two investments which have each produced returns over a period of seven years. Investment A produced a return of 20% in year one, zero in year two, 20% in year three, zero in year four, 20% in year five, zero in year six, and 12% in year seven. Investment B produced a return of 10% in each year. 3 a. Compute the arithmetic and geometric mean returns for each investment. 3 b. Beginning with $1000, work out what the value of each of the investments would have been after seven years, and determine which was the better invest- ment. 3 c. The two mean-return calculations, arithmetic and geometric, rank the in- vestments differently. Which one of the two correctly reproduces the ranking by total final value? Why does the other mean calculation get it 'wrong'?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:3. Consider two investments which have each produced returns over a period of
seven years. Investment A produced a return of 20% in year one, zero in year two,
20% in year three, zero in year four, 20% in year five, zero in year six, and 12% in
year seven. Investment B produced a return of 10% in each year.
3 a. Compute the arithmetic and geometric mean returns for each investment.
3 b. Beginning with $1000, work out what the value of each of the investments
would have been after seven years, and determine which was the better invest-
ment.
3 c. The two mean-return calculations, arithmetic and geometric, rank the in-
vestments differently. Which one of the two correctly reproduces the ranking
by total final value? Why does the other mean calculation get it 'wrong'?
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