(Solving a comprehensive problem) Use the end-of-year stock price data in the popup window, to answer the following questions for the Harris and Pinwheel companies. a. Compute the annual rates of return for each time period and for both firms. b. Calculate both the arithmetic and the geometric mean rates of return for the entire three-year period using your annual rates of retum from part a. (Note: you may assume that neither firm pays any dividends.) c. Compute a three-year rate of return spanning the entire period (i.e., using the ending price for period 1 and ending price for period 4). d. Since the rate of return calculated in part c is a three-year rate of return, convert it to an annual rate of return by using the following equation: a. Enter the annual rate of return for each year for Harris in the table below. (Round to two decimal places.) Value of Harris Stock Annual Rate of Return Value of Pinwheel Stock $11 6 Time 1 2 3 4 10 17 Time 1 2 3 e. How is the annual rate of return calculated in part d related to the geometric rate of return? When you are evaluating the performance of an investment that has been held for several years, what type of average rate of retum (arithmetic or geometric) should you use? Why? % Value of Harris Stock $11 6 10 17 % % Enter the annual rate of return for each year for Pinwheel in the table below. (Round to two decimal places.) Value of Pinwheel Stock Annual Rate of Return $21 34 28 27 -45.45% 66.67% 70.00% Three-Year Rate of Return $21 34 28 27 Annual Rate of Return Annual Rate of Return % ~ ) - ( + | % Annual Rate of Return 3 b. The arithmetic average rate of return earned by investing in Harris stock over this period is %. (Round to two decimal places.) The arithmetic average rate of return earned by investing in Pinwheel stock over this period is %. (Round to two decimal places.) The geometric average rate of return earned by investing in Harris stock over this period is %. (Round to two decimal places.) The geometric average rate of return earned by investing in Pinwheel stock over this period is %. (Round to two decimal places.) c. The three-year rate of return spanning the entire period for Harris is %. (Round to two decimal places.) The three-year rate of return spanning the entire period for Pinwheel is%. (Round to two decimal places.) d. The annual rate of return converted from the three-year rate in part c for Harris is The annual rate of return converted from the three-year rate in part c for Pinwheel is e. How is the annual rate of return calculated in part d related to the geometric rate of return? (Select the best choice below.) %. (Round to two decimal places.) %. (Round to two decimal places.)
