Question 3

(a) The S&P/ASX200 price index opened the year at 7,120 and closed at 6,950 by the end of the year. The equivalent accumulation index went from 76,470 to 78,760. What is the annual rate of return on each of these indices? Explain the difference in information provided by these two indices.

(b) Using the approach covered in your textbook calculate the geometric average annual rate of return over five years given the following annual rates, year 1 = 0.77%, year 2 = 0.83%, year 3 = 0.91%, year 4 = 1.02% and year 5 = 1.16% . What is the arithmetic average? Explain the difference between a geometric calculation and an arithmetic calculation.

(Rates as a percentages accurate to one basis point)