The common stock of the Brangus Cattle Company had the following end-of-year stock prices over the last five years and paid no cash dividends: Time Brangus cattle Comapny 1 $ 16 2 8 3 14 4 21 5 25
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Part 1
(Calculating the geometric and arithmetic average rate of return) The common stock of the Brangus Cattle Company had the following end-of-year stock prices over the last five years and paid no cash dividends:
|
Time |
Brangus cattle Comapny |
|
|
1 |
$
16 |
|
|
2 |
8 |
|
|
3 |
14 |
|
|
4 |
21 |
|
|
5 |
25 |
|
(Click on the icon in order to copy its contents into a spreadsheet.)
a. Calculate the annual
b. What is the arithmetic average rate of return earned by investing in Brangus Cattle Company's stock over this period?
c. What is the geometric average rate of return earned by investing in Brangus Cattle Company's stock over this period?
d. Which type of average rate of return best describes the average annual rate of return earned over the period (the arithmetic or geometric)? Why?
Question content area bottom
Part 1
a. The annual rate of return at the end of year 2 is
enter your response here
%. (Round to two decimal places.)
Part 2
The annual rate of return at the end of year 3 is
enter your response here
%. (Round to two decimal places.)
Part 3
The annual rate of return at the end of year 4 is
enter your response here
%. (Round to two decimal places.)
Part 4
The annual rate of return at the end of year 5 is
enter your response here
%. (Round to two decimal places.)
Part 5
b. The arithmetic average rate of return earned by investing in Brangus Cattle Company's stock over this period is
enter your response here
%. (Round to two decimal places.)
Part 6
c. The geometric average rate of return earned by investing in Brangus Cattle Company's stock over this period is
enter your response here
%. (Round to two decimal places.)
Part 7
d. Which type of average rate of return best describes the average annual rate of return earned over the period (the arithmetic or geometric)? Why? (Select the best choice below.)
A.
Geometric average return best describes the average annual rate of return over a period because it takes compounding into account, so it answers the question concerning the expected rate of return over a multi-year period.
B.
Geometric average return best describes the average annual rate of return over a period because it is a simple average, so it answers the question concerning the expected rate of return over a multi-year period.
C.
Arithmetic average return best describes the average annual rate of return over a period because it takes compounding into account, so it answers the question concerning the expected rate of return over a multi-year period.
D.
Arithmetic average return best describes the average annual rate of return over a period because it is a simple average, so it answers the question concerning the expected rate of return over a multi-year period.
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