Leeanne owns a stock that has an average geometric return of 12.30 percent and an average arithmetic return of 12.55 percent over the past six years. What average annual rate of return should Leeanne expect to earn over the next four years?
A)12.38%
B)12.40%
C)12.44%
D)12.47%
E)12.51%

Question

Quizplus · Accepted Answer

The expected average annual rate of return over the next four years is closer to the arithmetic average when the time horizon is short. Therefore, the expected return is slightly less than the arithmetic average of 12.55%, making 12.40% the most reasonable estimate.

Leeanne Owns a Stock That Has an Average Geometric Return