Question

11)When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns?A) When the set of returns includes only risk-free ratesB) When the set of returns has a wide frequency distributionC) When the set of returns has a very narrow frequency distributionD) When all of the rates of return in the set of returns are equal to each otherE) Never

Answer 1

Answer: E. Never

geometric average return can NEVER exceed the arithmetic average return for a given set of returns

Explanation:

The arithmetic average return is always higher than the other average return measure called the geometric average return. The arithmetic return ignores the compounding effect and order of returns and it is misleading when the investment returns are volatile.

Arithmetic returns are the everyday calculation of the average. You take the series of returns (in this case, annual figures), add them up, and then divide the total by the number of returns in the series. Geometric returns (also called compound returns) involve slightly more complicated maths.