Rate of Return

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

Time Caswell

1 $12

2 9

3 7

4 6

5 8

• Calculate the average 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)?
• The annual rate of return at the end of year 3 is what percent?