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You have found an asset with an arithmetic average return of 13.90 percent and a geometric...

You have found an asset with an arithmetic average return of 13.90 percent and a geometric average return of 10.50 percent. Your observation period is 50 years. What is your best estimate of the return of the asset over the next 5 years? 10 years? 20 years?

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Answer #1

Using Blume's Formula
T = 5 , N = 50
Return over 5 years  = (T-1)/(N-1)*Geometric Average + (N-T)/(N-1)*Arithmetic Average =(5-1)/(50-1)*10.50% +(50-5)/(50-1) *13.90% = 13.62%

T = 10 , N = 50
Return = (T-1)/(N-1)*Geometric Average + (N-T)/(N-1)*Arithmetic Average =(10-1)/(50-1)*10.50% +(50-10)/(50-1) *13.90% = 13.28%

T = 20 , N = 50
Return = (T-1)/(N-1)*Geometric Average + (N-T)/(N-1)*Arithmetic Average =(20-1)/(50-1)*10.50% +(50-20)/(50-1) *13.90% = 12.58%%

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