An asset has had an arithmetic return of 11.50 percent and a geometric return of

Question

An asset has had an arithmetic return of 11.50 percent and a geometric return of 9.50 percent over the last 78 years. What return would you estimate for this asset over the next 15 years? 19 years? 35 years? (Round your answers to 2 decimal places. (e.g., 32.16))

An asset has had an arithmetic return of 11.50 percent and a geometric return of 9.50 percent over the last 78 years. What return would you estimate for this asset over the next 15 years? 19 years? 35 years? (Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Solution:

Future Annual Returns using Arithemetic Return = (1 + Arithemetic Return)^n

Future Annual Returns using Geometric Return = (1 + Geometric Return)^n

where, n = number of periods(years).

Future Annual Returns using Arithemetic Return:

@15 yrs = (1+11.50%)^15 = 5.12%

@19 yrs = (1+11.50%)^19 = 7.91%

@35 yrs = (1+11.50%)^35 = 45.15%.

Future Annual Returns using Geometric Return:

@15 yrs = (1+9.50%)^15 = 3.90%

@19 yrs = (1+9.50%)^19 = 5.61%

@35 yrs = (1+9.50%)^35 = 23.96%.

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