Test QUESTION

Caswell Enterprises had the following end-of-year stock prices over the last five years and paid no dividends.

TimeCaswell: Time      Caswell

                                  1            $12

                                  2            $9

                                  3            $7

                                  4            $6

                                  5            $12

• Calculate the annual rate of return for each year from the above information.
• What is the arithmetic average rate of return earned by investing in Caswell's stock over this period?
• What is the geometric average rate of return earned by investing in Caswell's stock over this period?
• Considering the beginning and ending stock prices for the five-year period are the same, which type of average rate of return best describes the annual rate of return earned over the period (arithmetic or geometric)?