Over a 25-year period an asset had an arithmetic return of 13.1 percent and a geometric return of 12.6 percent. Using Blume's formula, what is your best estimate of the future annual returns over the next 10 years?
A) 11.18 percent
B) 13.04 percent
C) 11.84 percent
D) 12.91 percent
E) 12.46 percent

Question

Quizplus · Accepted Answer

Blume's formula is used to estimate future returns by weighting the arithmetic and geometric returns. For a 10-year period, the formula is: [(n-1)/(N-1)] * Arithmetic Return + [(N-n)/(N-1)] * Geometric Return, where n is the future period (10 years) and N is the historical period (25 years). Plugging in the values: [(10-1)/(25-1)] * 13.1 + [(25-10)/(25-1)] * 12.6 = 12.91 percent.

Over a 25-Year Period an Asset Had an Arithmetic Return