Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm


Postby anbu.edu » Tue Oct 15, 2013 5:41 am

16 Consider the following returns for the ABC Fund.
Year 1: +22.7%;
Year 2: +18.8%;
Year 3: -2.3%;
Year 4: +3.6%; and
Year 5: -17.7%.
If you held the fund for these 5 years, which number corresponds most closely to your annual holding period return?
Choose one answer.
a. 0.0396 Correct
b. 0.0512 Incorrect
c. 0.0738 Incorrect
d. 0.0945 Incorrect
The correct answer is 0.0396
[(1 + .227) (1 + .188) (1 - .023) (1 + .036) (1 - .177)](1/5) = 1.0396 or 3.96%

why we are not talking simple average?... why we are doing(1 + .227) (1 + .188) ...Can you please explain the concept behind this

Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm


Postby pradeeppdy » Tue Oct 15, 2013 9:19 am

You can not take simple average here because the returns are dependent to each other if something is not dependent on each others you can take simple average.
But if it is dependent you need to calculate it by geometric mean for the correct measurement.

Return to “CFA Level I”


Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.