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Explanation:
Geometric return is generally preferred over arithmetic return for measuring historical portfolio performance over multiple periods because it takes into account the compounding effect of returns. Arithmetic average returns assume that the capital base remains constant, whereas geometric average returns accurately reflect how an investment grows over time with reinvested earnings.
Q.28 During a job interview for the assistant financial risk manager role, the interviewers asked Jacob Lee to describe the advantages of geometric returns over arithmetic returns. Which of the following is an advantage of geometric returns over arithmetic returns?
A
Geometric returns are easier to calculate.
B
Geometric returns account for compounding effects.
C
Geometric returns are less volatile.
D
Geometric returns provide a better measure of central tendency.
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