Exercise 43 Page 625

Let's begin with recalling the definition of geometric mean. The geometric mean of two positive numbers aand bis the numberxsuch thatx=sqrt(a* b).In our exercise, we are given that the average rate of return on an investment over two years is the geometric mean of the two annual returns, which are 12 % and 7 %. Let p be the average rate of return on an investment over two years. p=sqrt(12* 7) Let's evaluate the square root on the right hand side of the equation.

The average rate of return on this investment over two years is about 9 %.