Question

(Calculating the geometric and arithmetic average rate of​ return)  The common stock of the Brangus Cattle Company had the following​ end-of-year stock prices over the last five years and paid no cash​ dividends: Time Brangus cattle Comapny 1 ​$14 2 11 3 12 4 24 5 25 a.  Calculate the annual rate of return for each year from the above information. b.  What is the arithmetic average rate of return earned by investing in Brangus Cattle​ Company's stock over this​ period? c.  What is the geometric average rate of return earned by investing in Brangus Cattle​ Company's stock over this​ period? d.  Which type of average rate of return best describes the average annual rate of return earned over the period​ (the arithmetic or​ geometric)? ​ Why? a.  The annual rate of return at the end of year 2 is nothing​%. ​(Round to two decimal​ places.) The annual rate of return at the end of year 3 is nothing​%. ​(Round to two decimal​ places.) The annual rate of return at the end of year 4 is nothing​%. ​(Round to two decimal​ places.) The annual rate of return at the end of year 5 is nothing​%. ​(Round to two decimal​ places.) b.  The arithmetic average rate of return earned by investing in Brangus Cattle​ Company's stock over this period is nothing​%. ​(Round to two decimal​ places.) c.  The geometric average rate of return earned by investing in Brangus Cattle​ Company's stock over this period is nothing​%. ​(Round to two decimal​ places.) d.  Which type of average rate of return best describes the average annual rate of return earned over the period​ (the arithmetic or​ geometric)? ​ Why?  ​(Select the best choice​ below.) A. Arithmetic average return best describes the average annual rate of return over a period because it takes compounding into​ account, so it answers the question concerning the expected rate of return over a​ multi-year period. B. Geometric average return best describes the average annual rate of return over a period because it takes compounding into​ account, so it answers the question concerning the expected rate of return over a​ multi-year period. C. Arithmetic average return best describes the average annual rate of return over a period because it is a simple​ average, so it answers the question concerning the expected rate of return over a​ multi-year period. D. Geometric average return best describes the average annual rate of return over a period because it is a simple​ average, so it answers the question concerning the expected rate of return over a​ multi-year period. Click to select your answer(s).

Answer 1