1. You invest in a portfolio and always reinvest any dividends and interest earned. Which of the following provides the best measure of the performance of that portfolio:
dollar-weighted return
geometric average return
arithmetic return
index return
Why does it provide the best measure?
2. Using data in the text, rank the following asset classes from lowest to highest average annual return over the period 1926 to 2013:
Small stocks
Long-term bonds
Large stocks
T-Bills
Why would you expect the relative returns to be ordered in this way? How would you expect these assets to be ranked by a standard risk measure?