Ask Question
26 January, 20:19

Over a 30-year period an asset had an arithmetic return of 13 percent and a geometric return of 10.5 percent. Using Blume's formula, what is your best estimate of the future annual returns over the next 10 years?

+4
Answers (1)
  1. 26 January, 23:57
    0
    12.22% will be the forecast rate over the next 10-years framework.

    Explanation:

    Blume's formula is used to do an average of both, the arithmetic and geometric mean. The formula is as follow:

    (T-1) / (N-1) * Geometric average + (N-T) / (N-1) * Arithmetic average

    Where:

    T = forecast period = 10 years for this case

    N = the data we have samples = 30 years for this particular project

    Then we have thegeometric and arthmetic mean

    We place them on the formula and solve for Return on Equity

    Return = (10-1) / (30-1) * 0.105 + (30-10) / (30-1) * 0.13

    Return = (9/29) *.105 + (20/29) *.13 = 0.122241379 = 12.22%

    12.22% will be the forecast rate over the next 10-years framework.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Over a 30-year period an asset had an arithmetic return of 13 percent and a geometric return of 10.5 percent. Using Blume's formula, what ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers