Question #34
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 15
Status: Incorrect
Correct Answer: A
Your Answer: C
Question
The debate over whether to use the arithmetic mean or geometric mean of market returns for the capital asset pricing model (CAPM):
Answer Choices:
A. limits its usefulness in estimating the required return of an asset
B. has little practical effect because they are both very close
C. was settled by the work of Harry Markowitz in 1972
Explanation
There are several characteristics of the CAPM that limit its usefulness in determining the
required returns, including the uncertainty whether we should use arithmetic or geometric
means as the appropriate measure of long-term average returns.