Calculate the geometric average return for S&P 500 large-cap stocks for a five-year period using the numbers given here.

First, convert percentages to decimal returns, add 1, and then calculate their product:

Notice that the number 1.5291 is what our investment is worth after five years if we started with a $1 investment. The geometric average return is then calculated as:

Thus, the geometric average return is about 8.87 percent in this example. Here is a tip: If you are using a financial calculator, you can put −$1 in as the present value, $1.5291 as the future value, and 5 as the number of periods. Then solve for the unknown rate. You should get the same answer we did.

Transcribed Image Text:

S&P 500 Returns 13.75% 35.70 45.08 -8.80 -25.13 Product 1.1375 x 1.3570 x 1.4508 x 9120 x .7487 1.5291