Posted: September 16th, 2017

Finance – Barris and Carson companies Assignment

Use the end of year stock price data in the pop up window to answer the following questions for the
Barris and Carson companies.
a. compute the annual rates of return for each time period and for both firms.
b. calculate both the arithmetic and geometric mean rates of return for the entire three year period using
your annual rates of return from part a. Note you may assume that neither firm pays any dividends.
c. compute a thee year rate of return spanning the entire period (ie., using the ending price fo period 1 and
ending price for period 4.
d. Since the rate of return calculated in part c is a three year rate of return, convert it to an annual rate of
return by using the following equation.
e. How is the annual rate of return calculated in part d related to the geometric rate of return? When you are
evaluating the performance of an investment that has be held for several years, what type of average rate
should yous (arithmetic or geometric)? Why?
(1 + Three- Year)
=
(1 + Annual Rate )3(1 + Annual Rate )3
( Rate of Return)
(of Return
)
a. Enter the annual rate of return for each year for Barris in the table below. (Round to two decimals place)
Value of Annual Value of Annual
Barris
Rate of Carson Rate of
Time
Stock
Return
Stock
Return
1
$11
$20
2
12
%
31
%
3
9
%
32
%
4
16
%
24
%
Enter the annual rate of return for each year for Carson in the table below. (round to two decimal places.

Time
1
2
3
4

Value of Annual Value of Annual
Barris
Rate of Carson Rate of
Stock
Return
Stock
Return
$11
$20
12
9%
31
%
9
-25%
32
%
16
78%
24
%

b. The arithmetic average rate of return earned by investing in Barris stock over this period is ______%
The arithmetic average rate of return earned by investing in Carson stock over this period is _______%
The geometric average rate of return earned by investing in Barris stock over this period is _________%
The geometric average rate of return earned by investing in Carson stock over this period is _________%
c. The three year rate of return spanning the entire period for Barris is _______%
The three year rate of return spanning the entire period for Carosn is _______%
d. the annual rate of return converted from the three-year rate in part c for Barris is ______%
the annual rate of return converted from the three-year rate in part c for Carson is ______%
e. How is the annual rate of return calculate in part d related to the geometric rate of return? (Select the
best choice)
ÿA. The annual rate of return calculated in part d is nothing but the geometric average rate of return
calculated in a different way
ÿB. The annual rate of return calculated in part d is nothing but the arithmetic average rate of return
calculated in a different way
ÿC. The annual rate of return calculated in part d is not related to the geometric average rate of return.
ÿD. The annual rate of return calculated in part d is the same as the geometric rate of return in this
problem but this is only a conincidence.
When you aare evaluating the performance of an investment that has been held for several years, what
type of average rate of return should you use (arithmetic or geometric)? Why? (Select the best choice)
ÿA. Geometric average return best describes the average annual rate of return over a period because it is
a simple average, so it answers the question concerning the expected rate of return over a period.
ÿB. Arithmetic average return best describes the average annual rate of return over a period because it is
a simple average, so it answers the question concerning the expected rate of return over a period.
ÿC. The geometric rate of return should be used. It best describes the averae annual rate of return over a
period because it compounds at the same rate while the arithmetic rate of return is best used for a single
period.
ÿD. The arithmetic rate of return should be used. It best describes the averae annual rate of return over
a period because it compounds at the same rate while the geometric rate of return is best used for a
single period.

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