Caswell Enterprises had the following end-of-year stock prices over the last fiv
ID: 2763261 • Letter: C
Question
Caswell Enterprises had the following end-of-year stock prices over the last five years and paid no dividends.
Time Caswell
1 $9
2 14
3 10
4 7
5 9
a. Calculate the average rate of return for each year from the above information.
b. What is the arithmetic average rate of return earned by investing in Caswell's stock over this period?
c. What is the geometric average rate of return earned by investing in Caswell's stock over this period?
d. Considering the beginning and ending stock prices for the five-year period are the same, which type of average rate of return best describes the annual rate of return earned over the period (arithmetic or geometric)?
e. The annual rate of return at the end of year 2 is what percent?
Explanation / Answer
Answer a:
Answer b:
Arithmetic average rate of return = Sum of all returns / Number of years
= 55.56-28.57-30.00+28.57 / 5 = 5.11%
Answer c:
Geometric average rate of return = nth root of product of all numbers
= 5th root of ( 55.56* -28.57* -30.00* 28.57) = 5th root of 1.36% = 0.27%
Answer d:
Considering the beginning and ending stock prices for the five-year period are the same(9), geometric average ( 0.27%) appears to be more accurate than arithmetic average ( 5.11%).
Answer e:
Annual rate of return at the end of year 2 = 55.56% (As calculated in table in Answer a) (14 - 9 / 9)%
Time Caswell Stock Price in $ Average rate of return(Current year price - last year price / last year price) 1 9 - 2 14 55.56% 3 10 -28.57% 4 7 -30.00% 5 9 28.57%Related Questions
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