A Challenge We Run Into When Forecasting Future Stock Returns Is That Stock Returns Compound So When Using Historical 1 (64.21 KiB) Viewed 29 times
A Challenge We Run Into When Forecasting Future Stock Returns Is That Stock Returns Compound So When Using Historical 2 (39.26 KiB) Viewed 29 times
A Challenge We Run Into When Forecasting Future Stock Returns Is That Stock Returns Compound So When Using Historical 3 (28.31 KiB) Viewed 29 times
A challenge we run into when forecasting future stock returns is that stock returns compound. So, when using historical averages to forecast the future, we need to average together the arithmetic and geometric average returns using Blume's Formula: R(T) = 1 Geo Avg + NT Arith Avg . N-1 In this formula, N is the number of historical annual returns you are using to calculate your averages and T is the number of future annual returns you are forecasting. Suppose you gather the following prices for a stock in order to calculate the last 10 (N = 10) annual returns. The stock does not pay dividends. Time 0 1 Price $23.16 $32.81
calculate the last 10 (N=10) annual returns. The stock does not pay dividends. Time 0 1 2 3 4 5 10 7 8 9 10 Price $23.16 $32.81 $33.63 $36.83 $41.95 $41.04 $33.83 $37.45 $30.56 $29.90 $47.93
Using Blume's formula, what is the expected return per year for the next 4 years (T = 4)? Enter your answer as a percentage, rounded to the nearest 0.0001. For example, for 0.1234567, enter 12.3457.
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