a. Over a 5-year period, an investment in a broad market index yielded annual returns of 10, 16, −5, −8, and 7 percent. What were the arithmetic and geometric average annual returns for this index?

b. Over a 25-year period, an investment in a broad market index yielded an arithmetic average return of 4 percent and a geometric average return of 3.6 percent. Using Blume’s formula, what would be the 5-year and 10-year average return forecasts?

c. Why is it important to control for the flow of funds into and out of an investment when calculating returns?