Sub 301, Sep 04, Q1

I was wondering if the n-year return (suppose n=2), in general, should be calculated as

(1+return)^2 = (1+return in first yr).(1+return in second yr)?

so that

return = sqrt{((1+return in first yr).(1+return in second yr)} - 1

The solution in booklet 4 suggests

return = (1+return in first yr).(1+return in second yr) - 1

 

From looking at the paper & report, would say that you would be ok using whole period return or annual return to answer the question, as long as you specify what you are using - the aim being commenting on the differences between the methods used and the resulting differences in answers; also demonstrating that you understand what to calculate rather than getting bogged down in the actual numerics...

 

Thank you