MBA 579 (Summer 2018) Homework: Chapter 7 Homework Save Score: 0 of 4 pts 6 of 8
ID: 2619144 • Letter: M
Question
MBA 579 (Summer 2018) Homework: Chapter 7 Homework Save Score: 0 of 4 pts 6 of 8 (4 complete) HW Score: 46.15%, 12 of P7-8 (similar to) Question Help (Related to Checkpoint 7.2) (calculating the geometric and arithmetic average rate of return) Marsh Inc. had the following end-of-year stock prices over the last five years and paid no cash dividends: Marsh $12 13 18 Time 12 a. The annual rate of return at the end of year 2 is%. (Round to two decimal places) teryour answer in the answer box and thenExplanation / Answer
a.
Rate of return = [(End of Period Value – Initial Value)/ Initial Value] x 100
Annual rate of return at the end of year 2, r2 = ($ 13 - $ 12)/$ 12 x 100
= $ 1 /$ 12 x 100 = 0.083333 x 100 = 8.33 %
Annual rate of return at the end of year 3, r3 = ($ 18 - $ 13)/$ 13 x 100
= $ 5 /$ 13 x 100 = 0.384615 x 100 = 38.46 %
Annual rate of return at the end of year 4, r4 = ($ 7 - $ 18)/$ 18 x 100
= - $ 11 /$ 18 x 100 = - 0.61111 x 100 = -61.00 %
Annual rate of return at the end of year 5, r5 = ($ 12 - $ 7)/$ 7 x 100
= $ 5 /$ 7 x 100 = 0.714286 x 100 = 71.43 %
b.
Arithmetic Average Return = (r2 + r3 + r4 + r5)/4
= (0.083333 + 0.384615 - 0.61111 + 0.714286)/4
= 0.571123/4 = 0.142781 or 14.28 %
c.
Geometric Average Return = [(1+ r2) x (1+ r3) x (1+ r4) x (1+ r5)] 1/4 -1
= [(1 + 0.083333) x (1 + 0.384615) x (1- 0.61111) x (1 + 0.714286)] 1/4 -1
= [(1.083333) x (1.384615) x (0.388889) x (1.714286)] 1/4 -1
= (1)1/4 -1 = 1 -1 = 0
d.
As the beginning and ending stock price for five years is same, the geometric rate of return we got zero.
Hence Geometric Rate of Return better describes the average annual rate of return earned over the period.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.