Geometric Average Return
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You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends.
Year Beginning of year price # shares bought or sold
2005 $50.00 100
2006 $55.00 50
2007 $51.00 75
2008 $54.00 75
a. What is the geometric average return for the period?
b. What is the dollar weighted return over the entire time period?
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Solution Summary
In this solution, we show how to calculate the geometric average return and the dollar weighted return over the entire given time period.
Solution Preview
a. To find the geometric average return, we note that:
In years 2005-06, the rate of return is (55-50)/50 = 10%
In years 06-07, the rate of return is (51-55)/55 = -7.27%
In years 07-08, the rate of return is (54-51)/51 = 5.88%
Then, the average return is ...
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