Question

A stock has had the following year-end prices and dividends:

Year Price Dividend
1 $ 43.31 -
2 48.29 $ .51
3 57.21 .54
4 45.29 .60
5 52.21 .65
6 61.29 .73
What are the arithmetic and geometric returns for the stock? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16))

Answer 1

Year Price Dividend Return

1 43.31 - -

2 48.29 0.51 12.68%

3 57.21 0.54 19.59%

4 45.29 0.60 -19.89%

5 52.21 0.65 16.71%

6 61.29 0.73 18.79%

arithmetic returns basically refer to the mean (or average) of the returns = (12.68% + 19.59% - 19.89% + 16.71% + 18.79%) / 5 = 47.88% / 5 = 9.58%

geometric returns involves multiplying the returns and then squaring them = ⁵√(1.1268 x 1.1959 x 0.8011 x 1.1671 x 1.1879) - 1 = 1.0840 - 1 = 0.084 = 8.40%