CH 18

Question 1

Define what is meant by a “time-weighted average”.

Answer 1

An average (often a geometric average) of the period-by-period holding-period returns of an investment.

Question 2

What is the “arithmetic average”?

[Example:of a 20 year period]

Answer 2

The sum of the 20 annual returns divided by 20.

Question 3

What is the “geometric average”?

[Example:of a 20 year period]

Answer 3

The constant annual return over the 20 years that would provide the same total cumulative return over the entire investment period.