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Over the past 12 years, the common stock of The Flower Shoppe has produced an arithmetic average return of 12.6 percent and a geometric average return of 12.3 percent. What is the projected return on this stock for the next five years according to Blume's formula

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Tundexi

Answer:

Return for next 5 year = 12.49%

Explanation:

N = number of forward years

T = number of past years

Blume's formula = ((Next n years - 1)/ Past T years - 1) * Geometric return + (N-T)/(N-1)* Arithmetic Average

Return for next 5 year = (5-1/12-1) * 0.123 + (12-5/12-1) * 0.126

Return for next 5 year = (4/11) * 0.123 + (7/11) * 0.126

Return for next 5 year = 0.04473 + 0.08018

Return for next 5 year = 0.12491

Return for next 5 year = 12.49%

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