Over the past 12 years, the common stock of The Flower Shoppe has produced an arithmetic average return of 12.6 percent and a geometric average return of 12.3 percent. What is the projected return on this stock for the next five years according to Blume's formula?

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Quizplus · Accepted Answer

Blume's formula is used to estimate future returns based on historical arithmetic and geometric averages. It gives more weight to the geometric average for longer periods. For a 5-year projection, the formula would result in a return closer to the arithmetic average, which is 12.6%, but slightly adjusted towards the geometric average, resulting in 12.49%.

Over the Past 12 Years, the Common Stock of the Flower