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McGraw Hill Integrated II, 2012

MH

McGraw Hill Integrated II, 2012 View details

1. Geometric Mean

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Exercise 43 Page 625

Recall the definition of geometric mean.

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

Practice makes perfect

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.

p=sqrt(12*7)

Multiply

p=sqrt(84)

Calculate root

p=9.1651...

Round to nearest integer

p≈9

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

Subchapter links

Exercises p.623-627