Based on the past 23 years, Westerfield Industrial Supply's common stock has yielded an arithmetic average rate of return of 10.5 percent. The geometric average return for the same period was 8.57 percent. What is the estimated return on this stock for the next 4 years according to Blume's formula?

10.3% (approx)

Explanation:

Given that,

Geometric average = 8.57%

Arithmetic average = 10.5%

Time period: future period, T = 4 years

Time Period: Past period, N = 23 years

According to Blume's formula,

Estimated return on this stock:

= [ (T - 1) : (N - 1) ] * Geometric average + [ (N - T) : (N - 1) ] * Arithmetic average

= [ (4 - 1) : (23 - 1) ] * 8.57% + [ (23 - 4) : (23 - 1) ] * 10.5%

= [3 : 22] * 0.0857 + [19 : 22] * 0.105

= 0.1363 * 0.0857 + 0.863 * 0.105

= 0.012 + 0.091

= 0.103

= 10.3% (approx)