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Year Net Return 1 7% 2 25% 3 -12% 4 -21% 5 18.74% (A) Compute the geometric and arithmetic (normal) mean of the 5 years

Year Net Return
1 7%
2 25%
3 -12%
4 -21%
5 18.74%

(A) Compute the geometric and arithmetic (normal) mean of the 5 years of returns

(B) What would be the total net return over all five years for an investor who bought at the beginning of year 1, and sold at the end of year 5?

(C) What constant annual return would you have to get for each of the five years in order to match the total five-year return you found in part (b)?

(D) Which of the following would you prefer for a five-year investment? Why?

(i) An investment that, after five years, will have a geometric mean return of 8% and an arithmetic mean return of 10%.

(ii) An investment that, after 5 years, will have a geometric mean return of 7% and an arithmetic mean return of 11%.

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