Problem 4: Arithmetic vs geometric means (5 points) (a) Compute the geometric and arithmetic (normal) mean of the following five years of returns: Year Net return 1 7% 2 25% 3 4 -21% 5 18.74% -12% Geometric mean: Arithmetic mean: (b) What would be the the total net return over all five years for an investor who bought at the beginning of year 1 and held to the end of year 5? Total five-year return: (c) What constant annual return would you have to get for each of the five years in order to match the total five-year return you found in part (b)? (Hint: Annualized EAR) Constant annual return: (d) Which of the following would you prefer for a five-year investment? Why? (i) An investment that, after five years, will have a geometric mean return of 8% and an arithmetic mean return of 10%. (ii) An investment that, after five years, will have a geometric mean return of 7% and an arithmetic mean return of 11%