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CFA Level I · CFA Level I Exam · Types of Financial Returns

An investor wants to estimate the expected return for a single future period, using a long series of past annual returns that are assumed to be independent draws from the same distribution. The most appropriate measure is the:

The arithmetic mean is most appropriate for estimating a single future period's expected return from independent, identically distributed past returns. It is the unbiased estimator of expected return, whereas the geometric mean measures compound growth over a past multi-period horizon.

  1. Ageometric mean return of the series.
  2. Barithmetic mean return of the series.Correct
  3. Charmonic mean return of the series.

Explanation

The arithmetic mean is the unbiased estimator of the expected one-period return. The geometric mean describes compound growth over the realized past horizon, and it understates the single-period expectation when returns vary. The harmonic mean is used for averaging prices, not returns.

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