Assume that the historical return on large-company stocks is a predictor of the

Question

Assume that the historical return on large-company stocks is a predictor of the future returns. What return would you estimate for large company stocks over the next year? The next 5 years? 20 years? 30 years? (Use Table 12.4) (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Future annual returns 1 year 5 years 20 years 30 years References eBook & Resources Learning Objective: 12-01 How to calculate the return on an investment Worksheet

Explanation / Answer

using blumes formuale we can find it
R(T)=(((T-1)/(N-1))* geometric average)+(((N-T)/(N-1))* arithmetic average)
Here R=return
T= no of years to estimate the return
N= no of observed years = between 1926 to 2010=85
1 year=(0*9.9%)+((85-1)/(85-1))*11.9%
=11.9%

5 years=(((5-1)/(85-1))*9.9%)+(((85-5)/(85-1))*11.9%)
=11.8%
20 years=(((20-1)/(85-1))*9.9%)+(((85-20)/(85-1))*11.9%)
=11.45%
30 years=(((30-1)/(85-1))*9.9%)+(((85-30)/(85-1))*11.9%)
=11.21%

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