Question

The rate of return that considers compounding of returns of the time horizon of an investment is:

A. arithmetic rate of return
B. geometric rate of return
C. expected rate of return
D. annualized rate of return

Answer 1

B. GEOMETRIC RATE OF RETURN

Step-by-step explanation:

The best answer is B.

Geometric rate of return is the compound annual rate of return produced by an investment. For example, a 3 year investment that returns +20% in the first year; -10% in the second year; and +20% in the third year has an arithmetic mean return of 10% (+20-10+20 = 30/3 = 10%)

However, in this example, $1 invested will equal $1.20 after year 1 (+20%); $1.08 after year 2 (-10%); and $1.296 after year 3 (+20%). This is the same as a compound annual return of 9% and this is the geometric rate of return.

Answer 2

B. geometric rate of return

Step-by-step explanation:

The geometric mean is the average growth of an investment computed by multiplying n variables and then taking the nth –root. Geometric Average Return is used for computation of Average rate per period on an investment compounded over multiple time periods. It is the average set of products technically defined as the 'n' th root products of the expected number of periods.Geometric mean takes several values and multiplies them together and sets them to the 1/nth power.