You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________.
A) dollar-weighted return
B) geometric average return
C) arithmetic average return
D) index return

Question

Quizplus · Accepted Answer

The arithmetic average return is the best choice for forecasting performance for the next year because it assumes that past returns are independent and identically distributed. This method provides an unbiased estimate of the expected return, making it more suitable for short-term forecasts compared to the geometric average or dollar-weighted return, which are influenced by the volatility and timing of cash flows, respectively.

You Have Calculated the Historical Dollar-Weighted Return, Annual Geometric Average