Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term while estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.

Question

Quizplus · Accepted Answer

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

Estimates of the Rate of Return on a Security Based