Marcus has an investment portfolio that paid the rate of return of 24.75%, -11%, - 30%, 19%, 15.5%, 12% and 20% over the last seven (7) years. 

Required: 

a) Calculate the arithmetic average return and the geometric average return of this portfolio. 

b) Discuss the difference between arithmetic average return and the geometric average return. When should Marcus use a specific average return? 

c) If the following information is available for Marcus's portfolio in the forecast for next year, calculate the expected return and identify the risk of return by computing the variance and the standard deviation.

 

State of economy      Probability of the economic state   Rate of Return  

   Boom                             0.55                                                          25%   

 Normal                             0.30                                                         17%  

Recession                         0.15                                                           -8%

Answer rating: 100% (QA)

Here is the solution a Calculate the arithmetic average return and the geometric average return of t... View the full answer