Investment Returns and Risk Analysis

Instructions:

The process of validating data is an integral component of any program that is data-driven. Because it is vital to eliminate issues from any project, data validation delivers correctness, details, and clarity. It verifies the correctness and completeness of the data, making it possible for the information to be relied upon while making decisions. The process of validating data entails examining the input data to ensure that it is correct and comprehensive, devoid of errors, and presented in the appropriate format. In addition to this, it may require validating the data by comparing it to previously collected information and checking that the data falls within a particular range.

Content:

Name

University

Course Code

Professor

Date

Investment Returns and Risk Analysis

Explain the differences between the arithmetic return and the geometric return. Include in your explanation what factor determines the difference between arithmetic returns and geometric (compounded) returns.

The significant difference existing between geometric and arithmetic returns is based on the calculation of the two measures of returns. The geometric return accounts for the compounding occurring from time to time. Thus, investors typically believe the geometric measure accurately reflects returns compared to the arithmetic average. The geometric mean is required when averaging percentages, such as the portfolio returns year over year. Nonetheless, Edspira (2016), Faulkenberry (n.d.), and Gallant (2019) argued that both measures of returns are important since they are returns. The geometric average return describes the investors’ earnings on a return during a specific year. However, arithmetic return is commonly used when reporting returns. The volatility of a return determines the difference between geometric and arithmetic returns. The difference between the geometric and arithmetic averages is significant when the volatility of an investment stream is high (Edspira, 2016; Faulkenberry, n.d.). The geometric measure accurately reflects the return on investment when the volatility is high since it accounts for year-over-year compounding.

If you own a stock with volatile returns over 2 years, will the average return be higher or lower than the geometric return? Explain why.

The geometric return over 2 years will be lower than the average return of stock with volatile returns if the stock has positive returns over the same period. Conversely, the average return will be below the geometric return if the stock has negative returns over two years. These situations will be possible since the geometric return takes into account the compounding effect of returns while the arithmetic average return only computes the total returns and is divided by the number of periods (Drake et al., 2013; Edspira, 2016; Faulkenberry, n.d; Gallant, 2019). Volatility causes a significant difference between the geometric and arithmetic average returns since the geometric average magnifies the compounding effect when variability in returns is high. The arithmetic measure does not consider volatility when computing the average returns. However, the geometric method accounts fo

Get the Whole Paper!

Do you need a custom essay? Order right now:

Order