Question

A stock has a geometric average return of 14.6 percent and an arithmetic average return of 15.5 percent based on the last 15 years. What is the estimated average rate of return for the next six years based on Blume's formula?

Answer 1

Answer:

15.18%

Explanation:

this problem is solved applying directly te Blume´s formula, which is the next:

$R_{t}=\frac{T-1}{N-1}*GeometricAverage+\frac{N-T}{N-1} *ArithmeticAverage$

where R is the return, T numbers of years to estimate and N is the observed number of years. So with given data, we have:

$R_{t}=\frac{6-1}{15-1}*0.146+\frac{15-6}{15-1} *0.155$

$R_{t}=15.18%$