Calculation:

To calculate the arithmetic mean return:

1. Sum of returns: 5.26% + (-2.10%) + 3.86% + 8.18% = 15.20%
2. Number of years: 4
3. Arithmetic mean = 15.20% ÷ 4 = 3.80%

Step-by-step verification:

• 5.26 + (-2.10) = 3.16
• 3.16 + 3.86 = 7.02
• 7.02 + 8.18 = 15.20
• 15.20 ÷ 4 = 3.80

Key Concept: The arithmetic mean is simply the sum of all values divided by the number of values. This is different from the geometric mean, which accounts for compounding effects. For investment returns, the arithmetic mean is appropriate for estimating expected returns when returns are independent over time.

Why not the other options:

• Option B (3.76%) might result from rounding errors or incorrect addition
• Option C (3.73%) might result from using geometric mean calculation or other errors