Question

From 1997-2006, the returns on Magni were as follows, Using Blume's Formula:

1997	15.83%
1998	-8.63%
1999	12.04%
2000	3.61%
2001	-6.66%
2002	13.95%
2003	10.21%
2004	-16.96%
2005	5.90%
2006	11.21%

A. What would be the 1-year average forecast?

B. What would be the 2-year average forecast?

C. What would be the 6-year average forecast?

D. What would be the 10-year average forecast?

Answer 1

The Blume's formula is given as

The geometric average is calculated as follows

Geometric average = (1.1583 x 0.9137 x 1.1204 x 1.0361 x 0.9334 x 1.1395 x 1.1021 x 0.8304 x 1.059 x 1.1121)^1/10

Geometric average = 3.48%

To find the arithmetic average

Year	Returns
1997	15.83%
1998	-8.63%
1999	12.04%
2000	3.61%
2001	-6.66%
2002	13.95%
2003	10.21%
2004	-16.96%
2005	5.90%
2006	11.21%
	∑Returns = 40.50%

Arithmetic average = 4.05%

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A)

1-year average forecast

1 year average forecast = 4.05%

B)

2-year average forecast

2 year average forecast = 3.99%

C)

6-year average forecast

6-year average forecast = 3.73%

D)

10 year average forecast

10 year average forecast = 3.48%