CFA Level 1 Exam: Understanding the Truth

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Question

Which of the following is true?

Answers

A. If the geometric return is zero, the arithmetic return must be negative.

B. All of these answers are false.

C. If the annual returns have zero volatility, the geometric return is equal to the arithmetic return.

D. The geometric return is always less than the arithmetic return.

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Explanations

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A. B. C. D.

The mean and the geometric mean are equal when volatility in the rate of return is zero. For a non- zero volatility, the mean exceeds the geometric mean and the difference is larger the higher the volatility.

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