Consider an investment with the following returns over 4 years: Year 1 2 3 4 Ret
ID: 3173848 • Letter: C
Question
Consider an investment with the following returns over 4 years:
Year
1
2
3
4
Return
10%
20%
5%
15%
a. What is the compound annual growth rate (CAGR) for this investment over the 4 years?
b. What is the average annual return of the investment over the 4 years?
c. Which is a better measure of the investment's past performance? If the investment's returns are independent and identically distributed, which is a better measure of the investment's expected return next year?
Year
1
2
3
4
Return
10%
20%
5%
15%
Explanation / Answer
Solution:
a)
1
2
3
4
average
10
2
-5%
15%
10.00%
CAGR
1.10
1.20
0.95
1.15
9.58%
b. average is 10.00%
c. CAGR, Arithmetic average
1
2
3
4
average
10
2
-5%
15%
10.00%
CAGR
1.10
1.20
0.95
1.15
9.58%