Let g1 be the annualized growth rate from period 0 to period 1 and let g2 be the
ID: 1093129 • Letter: L
Question
Let g1 be the annualized growth rate from period 0 to period 1 and let g2 be the annualized growth rate from period 1 to period 2. Let g_average= (g1 + g2)/2 be the average of these two growth rates. Now let g_02 be the annualized growth rate from period 0 to period 2 in a single step. Select the true statement below.
If the growth rates are discretely compounded, g_ave = g_02.
If the growth rates are continuously compounded, g_ave = g_02.
If the growth rates are continuously compounded, g_ave > g_02.
It is always the case that g_ave = g_02 no matter how the growth rates are computed.
If the growth rates are discretely compounded, g_ave = g_02.
If the growth rates are continuously compounded, g_ave = g_02.
If the growth rates are continuously compounded, g_ave > g_02.
It is always the case that g_ave = g_02 no matter how the growth rates are computed.
Explanation / Answer
If the growth rates are continuously compounded, g_ave > g_02.
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