Question

Which of the following statements is FALSE?

A. For a long-term forecast, you can be overly pessimistic if you use geometric average returns.

B. For a short-term forecast, you can be overly pessimistic if you use geometric average returns.

C. For a long-term forecast, you need to use geometric average of historical returns.

D. An investor can use weighted average of geometric and arithmetic average returns to forecast future returns.

E. For a short-term forecast, you need to use arithmetic average of historical returns.

Answer 1

Solution :

In short period of time arithmetic mean and geometric mean will not have much difference but for longer period of time due to copmouding effect the geometric mean will be lower than the arithmetic mean.

Option A ) This statement is correct as in long term geometric mean will be low.

Option B ) This statement is incorrect as in short term there will not be much difference in arithmetic and geometric mean.

Option C ) and E ) are correct as for long term geometric mean and for short term arithmetic mean is used

Option D ) Weighted average is used by an investor for forecasting the future return

Correct answer is B ) The statement is false