Explanation:
The primary advantage of geometric returns over arithmetic returns is that geometric returns account for compounding effects over multiple periods. This provides a more accurate measure of the actual wealth generated and the true compound growth rate of an investment over time, whereas arithmetic returns ignore the effects of compounding.
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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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