There is a common saying among investment professionals that "past performance does not guarantee future returns." If this statement is correct, then why is it important to understand the past performance of various asset classes?

Student answers will vary. One general theme might be that history provides a basis for comparison along with a general understanding of the risk-return tradeoff. Historical performance also provides investors with some understanding of what they can reasonably expect to earn. These expectations affect the prices investors are willing to pay, thereby tending to keep the performance of an asset class within its historical averages.