Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.
A)overestimate; overestimate
B)overestimate; underestimate
C)underestimate; overestimate
D)underestimate; underestimate
E)none of the above are correct

Question

Quizplus · Accepted Answer

The arithmetic average tends to overestimate long-term returns because it does not account for compounding, while the geometric average tends to underestimate short-term returns as it smooths out volatility.

Estimates Using the Arithmetic Average Will Probably Tend to _____