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Question 12.5: More Geometric Averages Take a look back at Figure 12.4 . Th...

More Geometric Averages Take a look back at Figure 12.4 . There, we showed the value of a $1 investment after 85 years. Use the value for the large-company stock investment to check the geometric average in Table 12.4.

Average Return
Series Geometric Arithmetic Standard Deviation
Large-company stocks 9.9% 11.9% 20.4%
Small-company stocks 12.1 16.7 32.6
Long-term corporate bonds 5.9 6.2 8.3
Long-term government bonds 5.5 5.9 9.5
Intermediate-term government bonds 5.4 5.5 5.7
U.S. Treasury bills 3.6 3.7 3.1
Inflation 3.0 3.1 4.2
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In Figure 12.4 , the large-company investment grew to $2,982.24 over 85 years. The geometric average return is thus

Geometric average return =2,982.24^{{1}/{85}}-1=.0987,  or  9.9\%

This 9.9% is the value shown in Table 12.4 . For practice, check some of the other numbers in Table 12.4 the same way.

FIGURE 12.4 EXP 51263

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