These questions are for exam MFE drawn from p. 152 of the ASM manual 9th edition 6th printing.
In the middle of the page, there is an example given of two stock return averages. The first way finds the rate of return of the average and the second way finds the average of the rates of return. Then a comparison of them is drawn to demonstrate use of Jensen's Inequality showing that the second method is >= the first method.
In the following paragraph, the first sentence reads, "which way is correct (i.e., method 1 or 2)? Almost anyone would consider the first way correct." Why is this the case? Additionally, I don't understand how the book is connecting this Jensen's Inequality example into anything. Have I missed the obvious?
I have some additional questions, but I will wait to ask them until getting an answer to this one because this answer might help me to unlock the others without wasting anybody's time & effort.
Thank you
In the middle of the page, there is an example given of two stock return averages. The first way finds the rate of return of the average and the second way finds the average of the rates of return. Then a comparison of them is drawn to demonstrate use of Jensen's Inequality showing that the second method is >= the first method.
In the following paragraph, the first sentence reads, "which way is correct (i.e., method 1 or 2)? Almost anyone would consider the first way correct." Why is this the case? Additionally, I don't understand how the book is connecting this Jensen's Inequality example into anything. Have I missed the obvious?
I have some additional questions, but I will wait to ask them until getting an answer to this one because this answer might help me to unlock the others without wasting anybody's time & effort.
Thank you
Lognormal questions