A company\'s stock price rose 2.8% in 2011, and in 2012, it increased 74.9%. Com

Question

A company's stock price rose 2.8% in 2011, and in 2012, it increased 74.9%. Compute The geometric mean rate of return for The two-year period 2011 -2012. If someone purchased $ 1,000 of The company's stock at The start of 2011, what was its value at The end of 2012? Over The same period, another company had a geometric mean rate of return of 10.1%. If someone purchased $ 1,000 of The other company's stock, how would its value compare to The value found in part (b)? The geometric mean rate of return for The two-year period 2011 - 2012 was %. (Type an integer or decimal rounded to two decimal places as needed.)

Explanation / Answer

A)

Let r = the geometric mean rate. Then,

(1+r)^2 = (1+0.028)(1+0.749)

Hence, solving for r,

r = 0.340884783 [answer]

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b)

A = 1000(1+0.028)(1+0.749) = 1797.97 [ANSWER]

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c)

A = 1000(1+0.101)^2 = 1212.20 [less than the value in part B)

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