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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.

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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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