Define Rt as the ratio of the value of an asset at the end of the tthperiod to its value at the end of the previous period. Rt is then a one-period relative equal to unity plus the interest rate. Assume that Rt is an independent, normally distributed random variable with mean μ and nonzero variance σ2. Rt is then observed as
where the disturbance term ∈t t is independently and normally distributed with mean zero and variance σ2. To assess the long-term expected rate of return of the asset, it is desirable to estimate its expected increment in value of the one-period relative raised to the Nth power, i.e., μN.