Study Question of the Week: August 20, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 65 and Series 66. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 65 and Series 66)

Over a five year period, the annual returns on a particular investment were 15%, -10%, -5%, 10%, 10%. What is the most appropriate measure of central tendency for this investment?

Answers:

A. arithmetic mean

B. geometric mean

C. median

D. mode

Correct Answer: B. geometric mean

Rationale: Central tendency is a single value that summarizes a set of scores. The geometric mean is the most accurate measure of central tendency for a set of returns because the returns for each year on an investment are not independent of one another. Each year your total capital is shrinking or growing depending on the performance of the previous year, so that a 10% increase one year may be different than a 10% increase in another year. The arithmetic average does not account for this fact. The geometric mean does account for this, and thus gives the investor a truer representation of the central tendency of their returns.

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