Question

Which of the following(s) is/are incorrect about the arithmetic average return (AAR)?

a) Both (A) and (B) are incorrect about AAR.
b) (A) It tells us the actual performance of a portfolio over the past sample period.
c) (B) We use it to evaluate the past performance of securities.
d) Both (A) and (B) are correct about AAR.

Answer 1

AAR is used to evaluate the expected performance of securities and not the actual performance, making statement (A) incorrect while statement (B) is correct. Hence, option 'a)' is the accurate choice stating both (A) and (B) are incorrect about AAR is indeed incorrect.

Step-by-step explanation:

When evaluating the correctness of statements about the Arithmetic Average Return (AAR), one must understand what AAR represents. The AAR calculates the mean of a series of returns, which can provide insights into the expected performance of an investment or portfolio. However, AAR may not always represent the actual performance of said investment.

(B) 'We use it to evaluate the past performance of securities' is a correct statement about AAR. However, (A) 'It tells us the actual performance of a portfolio over the past sample period' can be misleading because AAR does not account for the compounding effect of returns over multiple periods, which can lead to differences in the actual performance.

Therefore, the correct answer to the question is that option (A) is incorrect about AAR, making option 'a)' the correct choice.