Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.
A) overestimate; overestimate
B) overestimate; underestimate
C) underestimate; overestimate
D) underestimate; underestimate
E) accurately; accurately

Question

Quizplus · Accepted Answer

The arithmetic average tends to overestimate long-term returns because it does not account for compounding, while the geometric average, which accounts for compounding, tends to underestimate short-term returns.

Estimates Using the Arithmetic Average Will Probably Tend to _____