Average Rate of Return
Average Rate of Return
Suppose the annual rates of return on your investment portfolio during the five years were
2000 -11%
1999 32%
1998 5%
1997 17%
1996 23%
1. Compute the arithmetic average annual rate of return for the five-year period.
2. If you started with $5,000 on January 1, 1996, compute the amount of money in your portfolio at the end of each of the five years.
3. What was your geometric average annual rate of return for the five-year period?
4. Use the geometric average rate of return computed above to estimate your wealth at the end of five years if you started 1996 with $5,000.
5. Your friend started 1996 with $6,500. His broker advised him that he had the following amounts at the end of the following years:
1996. 6,800
1997. 8,800
1998. 9,500
1999. 12,300
2000. 11,250
What was the geometric average annual rate of return for your friend?
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