Arithmetic Mean: A Bellwether for Unbiased Forecasting of Portfolio Performance

Abstract:     
Estimates of terminal value of long-tern investment horizons are biased. Unbiased estimates exist only for investment horizon of one time-period. The purpose of our paper is to suggest a method based on the arithmetic mean in order to obtain unbiased estimates for the terminal value of long-tern investment horizons. We suggest equating the time-period of our observed data to the time-period of the investment horizons. The performance of the suggested method is statistically investigated with the help of loss functions or error statistics. It produced the closest values to the actual ones than any other suggested averaging method when we examined a ten-year investment horizons for Standard & Poor's 500 index and on Dow Jones Industrial index.

Number of Pages in PDF File: 23

Keywords: Portfolio evaluation, Unbiased estimation, Long-term investment horizon, Arithmetic mean, Geometric mean, Logarithmic mean.

JEL Classification: G11

working papers series