Sample Question #90 (finance)

An asset I’ve held for exactly five years has generated a total return of 76.2%. What was its average annual return over this five-year period? Show me your calculation.

(Comment: calculating asset returns is a very fundamental operation on finance, but a lot of candidates get even the easiest questions wrong. Don’t ever let your guard down even if you think a question is "too easy.")

(Hint: it ain’t 76.2/5!)

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ANSWER

(1+x)^5 = 1.762 ==> x=0.12

I first thought without calculator to solve (1+x)^5 = 1.762.(1+x)^5=1+5x+10x^2+10x^3+5x^4+x^5, approximate it, 1+5x=1.762then x=0.1524A huge offset.

As long as you know it’s (1+x)^5 = 1.762, you’re okay. I don’t think any interviewer would expect you to solve the equation by hand. 🙂

The question seems easy but most non-finance candidates get it wrong. It’s so basic that if you say on your resume you know some finance, you should definitely know how to calculate returns, including log returns and continuously compounded returns.