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 and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.
A)overestimate; overestimate
B)overestimate; underestimate
C)underestimate; overestimate
D)underestimate; underestimate
E)accurately; accurately

Question

Quizplus · Accepted Answer

Estimates based on a historical arithmetic average tend to overestimate the expected return for the long-term because they do not account for the compounding of returns. Estimates using the historical geometric average, which does account for compounding, tend to underestimate the expected return for the short-term because they reflect the compounded past returns, which may be lower than short-term fluctuations.

Estimates of the Rate of Return on a Security Based