Suppose that an investor opens an account by investing $1,000. At the beginning of each of the
Question:
Suppose that an investor opens an account by investing $1,000. At the beginning of each of the next four years, he deposits an additional $1,000 each year, and he then liquidates the account at the end of the total five-year period.
Suppose that the yearly returns in this account, beginning in year 1, are as follows: −9 percent, 17 percent, 9 percent, 14 percent, and −4 percent. Calculate the arithmetic and geometric average returns for this investment, and determine what the investor’s actual dollar-weighted average return was for this five-year period. Why is the dollar-weighted average return higher or lower than the geometric average return?
Step by Step Answer:
Fundamentals of Investments, Valuation and Management
ISBN: 978-1259720697
8th edition
Authors: Bradford Jordan, Thomas Miller, Steve Dolvin