GMAT Focus EditionData InsightsEasy
A financial analyst is comparing two investment portfolios, Portfolio X and Portfolio Y, over a 5-year period. Portfolio X generated annual returns of 8%, 10%, 7%, 12%, and 9%. Portfolio Y generated annual returns of 9%, 8%, 11%, 10%, and 7%. Which portfolio had a higher arithmetic mean annual return?
- APortfolio X
- BBoth portfolios had the same arithmetic mean annual return
- CCannot be determined from the given information
- DPortfolio Y
Show answer & explanationAnswer & explanation
Correct answer: B. Both portfolios had the same arithmetic mean annual return
To find the arithmetic mean, sum the annual returns and divide by the number of years. Both portfolios yield the same arithmetic mean of 9.2%.
Why the other options are wrong
- A. Incorrect. Portfolio X's mean is 9.2%, which is not higher than Portfolio Y's.
- C. Incorrect. The arithmetic mean can be determined with the given data.
- D. Incorrect. Portfolio Y's mean is 9.2%, which is not higher than Portfolio X's.
Arithmetic Mean
The arithmetic mean is the sum of a set of values divided by the number of values in the set. It is a common measure of central tendency.
- Calculated by summing all data points and dividing by the count of data points.
- Sensitive to outliers.
- Most commonly used average.
Memory trick: Sum it up, then divide by how many there are!