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Quarterly Return

In one year, a security market index has the following quarterly price returns:

First quarter
3%

Second quarter
4%

Third quarter
-2%

Fourth quarter
5%

The price return for the year is closest to:   from Kaplan Schweser 

I tried annualizing the reurn (1+Quarter return/4)4 =(1+Annual Return) .. then added all the annual returns… I got the answer 10.2%.  But this is a time consuming process to solve.

The solution in kaplan is (1+Qr1)(1+QR2)(1+QR3)(1+QR4)-1 …. My question is when do I use this formula? and when do I use Geometric mean to estimate the return?

Thanks

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Hanuman wrote:
The solution in kaplan is (1+Qr1)(1+QR2)(1+QR3)(1+QR4)-1 …. My question is when do I use this formula? and when do I use Geometric mean to estimate the return?

Use this formula when you want the return for the entire period.

Use the geometric mean when you want the average (compound) return for each subperiod.

Simplify the complicated side; don't complify the simplicated side.

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S2000magician wrote:

Hanuman wrote:
The solution in kaplan is (1+Qr1)(1+QR2)(1+QR3)(1+QR4)-1 …. My question is when do I use this formula? and when do I use Geometric mean to estimate the return?

Use this formula when you want the return for the entire period.

Use the geometric mean when you want the average (compound) return for each subperiod.

Thank You for clarifying. Nice clarification.

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Basically it’s the geometric mean formula, in GM the power is n as in number of years. Here we have quaters so number of years is 1.