 # Quant Quest

What is the holding period return on a 6 year investment in ABC made at the beginning of 1999? Year Return (%) 1999 3 2000 4 2001 4.3 2002 5 2003 4.1 2004 6 The answer that I dont understand is (1.03)(1.04)(1.043)(1.05)(1.041)(1.06) -1 = 29.45% (isnt this the geometric mean?) why we wont use the HPR = ending value - beg value/beg value ? Thanks

it would give you the same answer. and investment of \$100 that earns 3%, 4%, 4.3%, 5%,4.1% and 6% over 6 years woudl then be worth \$129.45. That’s not the geometric mean, to get that take [(1+0.2945)^(1/6)] -1 Note that the arithmetic mean is (3+4+4.3+5+4.1+6)/6 = 4.4% The reason you add 1 to the returns and multiply is compound interest…gains on gains.

faraz70s Wrote: ------------------------------------------------------- > > The answer that I dont understand is > (1.03)(1.04)(1.043)(1.05)(1.041)(1.06) -1 = 29.45% > (isnt this the geometric mean?) No it is not Geo mean … bcoz for geo mean it is [(1.03)(1.04)(1.043)(1.05)(1.041)(1.06)] ^ 6 - 1 the rest cardshark explained well

cannot be ^6. it has gotta be ^ (1/6) you have 6 years returns. and you are trying to find the CAGR (Compounded annual growth rate).