A stock has an arithmetic average return of 10.4% and a geometric average return of 8.8% based on the annual returns for the last 25 years. What is the best estimate of the annual return on this stock over the next 5 years?
A) 11.04%
B) 12.68%
C) 13.01%
D) 10.13%
E) 12.87%

Question

Quizplus · Accepted Answer

The geometric average return is the best estimate for future returns because it accounts for the compounding effect of investment returns over time, unlike the arithmetic average. Given the geometric average return of 8.8%, the best estimate for the annual return over the next 5 years would be closest to this figure, which is option D) 10.13%. However, it's important to note that the actual best estimate should be 8.8% itself, but given the options, D) is the closest and seems to be a typographical error in the context of the question's logic.

A Stock Has an Arithmetic Average Return of 10