You invested $1,000 in Netflix stock 2 years ago. 1st year's return was +25%, but in the 2nd year the return was -25% (alas!).

1) What is your 2-year holding period return for this investment?

2) What is the appropriate average return for your 2-year investment above?

3) What is the dollar value of your investment at the end of 2nd year?

4) Your friend says, "The average of 25% and -25% is just zero. So, you didn't lose any money for this investment!" Is this comment true or false?

5) From the analysis thus far, which average measure is appropriate as an annual return in this case?

Arithmetic average return

Geometric average return

Year Year 1 Year 2 Return +25% -25%