CFA Level I · CFA Level I Exam · Types of Financial Returns
An analyst wants to estimate the expected return for the next single period from a long history of independent annual returns. Which measure is most appropriate?
The arithmetic mean return is most appropriate. It is the unbiased estimate of the expected return for one future period. The geometric mean describes past compound growth over multiple periods, and the harmonic mean is used for averaging prices or ratios.
- AGeometric mean return
- BHarmonic mean return
- CArithmetic mean returnCorrect
Explanation
The arithmetic mean is the unbiased estimator of the expected return for a single future period. The geometric mean describes past compound growth, not the one-period expectation. The harmonic mean applies to averaging ratios such as average cost, not returns.
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