Question

 Which of the following best describes the differences between the arithmetic mean and geometric mean growth rates?

•  The procedures used to calculate the geometric mean growth rate and arithmetic

•  mean growth rate are somewhat different, but produce the same result.

•  The geometric mean growth rate calculation takes into account changes in the basis, while the arithmetic mean growth rate does not.

•  The arithmetic mean growth rate is preferable to the geometric mean growth rate when calculating rates of return based on changes in stock price.

•  The geometric mean growth rate is preferable to the arithmetic mean growth rate when calculating rates of return based on changes in stock price.

•  More than one of the answers is correct.

Answer 1

Answer: Option D: The Geometric mean growth rate is preferable to the arithmetic mean growth rate when calculating rates of returns based on changes in stock price.

An arithmetic mean growth rate is the sum of a series of numbers divided by the count of that series of numbers.The geometric mean growth rate for a series of numbers is calculated by taking the product of these numbers and raising it to the inverse of the length of the series.

Since geometric mean calculations takes into account the compounding that occurs from period to period. So it is more preferable.