Essentials of Corporate Finance
8th Edition
ISBN: 9780078034756
Author: Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 10.5, Problem 10.5ACQ
Summary Introduction
To discuss: The type of average return that the investor should use to forecast the stock market prices for the next one year.
Introduction:
Total return refers to the total income from an investment. It includes the periodic incomes and the increase or decrease in the value of an asset.
Average returns refer to the returns that the investments earn in a typical year.
Arithmetic average return refers to the returns that an investment earns in an average year over different periods.
Geometric average return refers to the return per year after compounding the average returns for multiple years.
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Students have asked these similar questions
The metric that is used to show the extent to which a given stock’s return move up and down with the stock market?
a. Correlation
b. Beta
c. Standard deviation
d. Expected return
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) = T GeoAvg + 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
Time
0
calculate the last 10 (N=10) annual returns. The stock does not
pay dividends.
1
2
3
4
5
10
6
.
7
8
9
10
Price
$23.16
$32.81
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…
how do you calculate a stocks average monthly return,its return variance ,standard deviation and beta? what is the formula
Chapter 10 Solutions
Essentials of Corporate Finance
Ch. 10.1 - Prob. 10.1ACQCh. 10.1 - Why are unrealized capital gains or losses...Ch. 10.1 - What is the difference between a dollar return and...Ch. 10.2 - Prob. 10.2ACQCh. 10.2 - Prob. 10.2BCQCh. 10.2 - Prob. 10.2CCQCh. 10.2 - Prob. 10.2DCQCh. 10.2 - Prob. 10.2ECQCh. 10.2 - Prob. 10.2FCQCh. 10.3 - What do we mean by excess return and risk premium?
Ch. 10.3 - Prob. 10.3BCQCh. 10.3 - Prob. 10.3CCQCh. 10.3 - What is the first lesson from capital market...Ch. 10.4 - In words, how do we calculate a variance? A...Ch. 10.4 - Prob. 10.4BCQCh. 10.4 - Prob. 10.4CCQCh. 10.4 - What is the second lesson from capital market...Ch. 10.5 - Prob. 10.5ACQCh. 10.5 - Prob. 10.5BCQCh. 10.6 - What is an efficient market?Ch. 10.6 - Prob. 10.6BCQCh. 10 - Prob. 10.1CCh. 10 - Prob. 10.3CCh. 10 - Prob. 10.4CCh. 10 - Prob. 10.5CCh. 10 - Prob. 10.6CCh. 10 - Prob. 1CTCRCh. 10 - Prob. 2CTCRCh. 10 - Risk and Return. We have seen that over long...Ch. 10 - Market Efficiency Implications. Explain why a...Ch. 10 - Prob. 5CTCRCh. 10 - Prob. 6CTCRCh. 10 - Prob. 7CTCRCh. 10 - Prob. 8CTCRCh. 10 - Efficient Markets Hypothesis. There are several...Ch. 10 - Prob. 10CTCRCh. 10 - Prob. 1QPCh. 10 - Prob. 2QPCh. 10 - Prob. 3QPCh. 10 - Prob. 4QPCh. 10 - Prob. 5QPCh. 10 - Prob. 6QPCh. 10 - Prob. 7QPCh. 10 - Prob. 8QPCh. 10 - Prob. 9QPCh. 10 - Prob. 10QPCh. 10 - Prob. 11QPCh. 10 - Prob. 12QPCh. 10 - Prob. 13QPCh. 10 - Prob. 14QPCh. 10 - Prob. 15QPCh. 10 - Prob. 16QPCh. 10 - Prob. 17QPCh. 10 - Prob. 18QPCh. 10 - Prob. 19QPCh. 10 - Prob. 20QPCh. 10 - Prob. 21QPCh. 10 - Prob. 22QPCh. 10 - Prob. 23QPCh. 10 - Prob. 24QPCh. 10 - Prob. 25QPCh. 10 - Prob. 26QPCh. 10 - Prob. 27QPCh. 10 - Prob. 28QPCh. 10 - Prob. 1CCCh. 10 - Prob. 2CCCh. 10 - Prob. 3CCCh. 10 - Prob. 4CCCh. 10 - Prob. 5CC
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