Question

3. Measuring stand-alone risk using realized (historical) data

Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock.

Consider the case of Celestial Crane Cosmetics Inc. (CCC):

Five years of realized returns for CCC are given in the following table. Remember:

1.	While CCC was started 40 years ago, its common stock has been publicly traded for the past 25 years.
2.	The returns on its equity are calculated as arithmetic returns.
3.	The historical returns for CCC for 2014 to 2018 are:

	2014	2015	2016	2017	2018
Stock return	3.75%	2.55%	4.50%	6.30%	1.95%

a.Given the preceding data, the average realized return on CCC’s stock is___ .

b.The preceding data series represents______ of CCC’s historical returns. Based on this conclusion, the standard deviation of CCC’s historical returns is_____ .

c.If investors expect the average realized return from 2014 to 2018 on CCC’s stock to continue into the future, its coefficient of variation (CV) will be ____ .

Answer 1

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