P1.T3.705. Mutual funds

[dtammerz]

Hi @cyrilgedeon Given the following assumption of per annum return over five years +7.0%, +15.0%, +20.0%, +5.0%, +18.0%, I get:

• Arithmetic mean = (0.07 + 0.15 + 0.20 + 0.05 + .18)/5 = 13.0%, and
• Geometric mean = 1.07*1.15*1.20*1.05*1.18 = 1.829507 and (1.829507)^(1/5) - 1 = 12.841%; and then testing to confirm 1.12841^5 = 1.8295, so 12.841 still looks okay to me.

I wrote the question so you don't have to do the geometric calculation, but instead just fine that the arithmetic mean is 13.0%. Then, as noted, the geometric mean will be less than the arithmetic mean by about one half the variance. In this case, the variance = 0.003560, such that 13.0% - 0.003560/2 = 12.8220% which approximates the 12.841%. I hope that explains, thanks!

A bit off topic but, do you think we will need to know how to calculate geometric mean for the FRM Part 1 in October/November 2020?

 

[David Harper CFA FRM]

Hi @dtammerz We can't confidently predict, but I would highly recommend being familiar with arithmetic versus geometric returns (and therefore, yes, I do recommend knowing how to calculate a geometric return), if for no other reason than the distinction makes more than one appearance in the FRM (across both parts). It's a fundamental concept to returns, and therefore a candidate for being tested on the exam. It's true GARP's new Chapter 3 Fund Management (FMP-3) fails to explicitly review it under its associated Learning Objective ("Calculate the return on a hedge fund investment and explain the incentive fee structure of a hedge fund including the terms hurdle rate, high-water mark and clawback") but their FMP-3 is sort of shallow coverage to some of its LOs. I do recommend knowing how to calculate geometric returns. (This question occurs in FMP-3). I hope that's helpful,

 

[dtammerz]

Hi @dtammerz We can't confidently predict, but I would highly recommend being familiar with arithmetic versus geometric returns (and therefore, yes, I do recommend knowing how to calculate a geometric return), if for no other reason than the distinction makes more than one appearance in the FRM (across both parts). It's a fundamental concept to returns, and therefore a candidate for being tested on the exam. It's true GARP's new Chapter 3 Fund Management (FMP-3) fails to explicitly review it under its associated Learning Objective ("Calculate the return on a hedge fund investment and explain the incentive fee structure of a hedge fund including the terms hurdle rate, high-water mark and clawback") but their FMP-3 is sort of shallow coverage to some of its LOs. I do recommend knowing how to calculate geometric returns. (This question occurs in FMP-3). I hope that's helpful,

thanks so much!