You invested $1,000 through your broker three years ago. Your account balance at the beginning of each period is shown in the table below.

Time Account Balance Annual Return

0 $1,000 n.a.

1 $1,200

2 $1,500

3 $1,000

- Calculate the annual return for each year. Show your calculations in the table.

- Your broker called to tell you the good news that your average annual return over the three years has been 4%. Where did he get this number?

- At first you are confused. It seems as though the broker must be mistaken because you are no better off than when you started investing three years ago. But then you remember something from your favorite investments class. Suggest an alternate measure for the average return. Calculate this measure and explain to your broker why it is more appropriate.

- Explain to your broker when it would make sense to use the 4% result that he initially quoted you.