Question

based on the past 13 years, valdez interiors common stock has yielded an arithmetic average rate of return of 12.6 percent. the geometric average return for the same period was 11.8 percent. what is the estimated return on this stock for the next three years according to blume's formula?

Answer 1

The estimated return on Valdez Interiors' common stock for the next three years, using Blume's formula which incorporates the arithmetic and geometric average returns of the past 13 years, is approximately 12.07 percent.

Step-by-step explanation:

According to Blume's formula, the estimated return on Valdez Interiors' common stock for the next three years can be calculated using the arithmetic average return and the geometric average return. The formula is:

Estimated Future Return = (2 × Arithmetic Average Return) + Geometric Average Return) / 3

Applying the given returns:

Estimated Future Return = (2 × 12.6% + 11.8%) / 3

Using this formula:

Estimated Future Return = (25.2% + 11.8%) / 3

Estimated Future Return = 36.2% / 3

Estimated Future Return = 12.07%

The estimated return on Valdez Interiors' common stock for the next three years, according to Blume's formula, is approximately 12.07 percent.