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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