CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Compared to geometric mean, the arithmetic return is typically ______ if the holding period returns are not equal.

A. biased upward
B. biased downward
C. the same as the arithmetic return
Correct Answer: A

The bias is especially severe if the holding period returns are a mix of both positive and negative returns.

User Contributed Comments 6

User Comment
czar won't it be biased downward? can somebody please help?
michlam14 found the answer, unless R is the same every period, the geometric mean will always be smaller than Arithmetic mean. IMO i think because for arithmetic mean it is reduced by N whereas Geometric mean is reduced exponetially by nth. You should look up the formula of Geometric mean in the text book for negative value return.
jonan203 arithmetic mean does NOT take into account compounding, which is why geometric (compounded rate of return) mean will typically be smaller
Admir Geometric mean is always equal to or lower than the arithmetic mean. Never higher.
robbiecow If not equal A (arithmetic) > G (geometric) > H (harmonic)
Like in the alphabet A before G before H
pigletin essentially a math problem
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