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?
A) 14.79 percent
B) 14.96 percent
C) 15.28 percent
D) 15.18 percent
E) 15.42 percent

Question

Quizplus · Accepted Answer

Blume's formula is used to estimate future returns and is given by: [(T-1)/(N-1)] * Geometric Average + [(N-T)/(N-1)] * Arithmetic Average, where T is the number of years in the future (6 years), and N is the total number of years of data (15 years). Plugging in the values: [(6-1)/(15-1)] * 14.6 + [(15-6)/(15-1)] * 15.5 = 15.18 percent.

A Stock Has a Geometric Average Return of 14