Chapter 12.5, Problem 12.5BCQ

Summary Introduction

To critically think about: The type of average return that the investor should use to forecast the stock market prices for the next century.

Introduction:

Total return refers to the total income from an investment. The total income 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.