CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
An analyst wants to estimate the return an investor would expect to earn in a single future period from a series of past annual returns that vary widely. Which measure is most appropriate?
The arithmetic mean return is most appropriate. It is the best estimate of the expected return in a single future period, whereas the geometric mean measures compound historical growth over several periods and the money-weighted return reflects the investor's cash flow timing.
- AArithmetic mean returnCorrect
- BGeometric mean return
- CMoney-weighted return
Explanation
The arithmetic mean is the unbiased estimate of the expected one-period return. The geometric mean describes the compound growth over multiple periods and is lower when returns are volatile. The money-weighted return depends on cash-flow timing, not forecasting.
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