[gilson]

You invest EUR 300,000 and hold for three years
. EUR 100,000 in a bond which provides a coupon after one, two and three years of 6% of the par value of EUR 120,000. The bond matures after three years.
. EUR 100,000 in stocks, which provide a dividend yield of 2% after one, two and three years. In the first year the portfolio goes up 10%, in the second year it falls 20% and the third year it rises 15%
. EUR 100,000 in a money market fund paying 4% per year over the three years, and into which you put any dividends or coupons.
What is your average yearly performance (i.e, return)?

[ArcSine]

Step One is to determine exactly what your 'horizon' value is. That is, how much will you have in three years, in total, from all three investments?

The bond is easy: it'll mature at 120K plus the final coupon payment. You put 100K into the equities; their horizon value will be 100K x 1.10 x 0.80 x 1.15, given the annual price moves.

The mon mkt fund will take a little more effort, but still easy. Be sure to add each year's bond coupon payment, and each year's dividend payout (from the equities) to the fund, as well as the fund's own interest earnings at 4% of each year's beginning balance.

Step Two: Having figured out what you'll have in each of the three investments at the end of the third year, let's call that total future value 'F'. Now do the following calculator tango:

[ F / 100K ] ^ (1/3) - 1

This result, the third root of the ratio of F to your starting amount of 100K, is the geometric mean of your total 3-year appreciation or depreciation. After deducting 1 from the result, you'll have what's usually meant by 'average annual return'.

Cheers!

...it was early and I was full of no coffee...

[gilson]

On the non mkt fund should I add to beginning of the yr the 4% earning from previous year?

[ArcSine]

Yes (which, by the way, is the essence of 'compounding'). For example, your money market fund should have earned interest of $4K by the end of the first year. This amount would be added to the fund's balance starting with the first day of second year (along with the bond's coupon payment, and the stocks' dividend payment).

Good luck!

...it was early and I was full of no coffee...