Question

Cakio Inc. would like to launch a new product line. They found the following alternatives to do so.

Alternative	Expected Return	Standard Deviation of Return
Trucks	21%	6%
Steamrollers	22%	8%
Pavers	15%	5%

Calculate the coefficient of variation for trucks.

An investment has returned 5%, 3%, −4%, 6%, and −7% in each of the last five years, respectively. We have decided that we want to use historical returns as a proxy for expected future returns. What is the expected rate of return?

Answer 1

1]

coefficient of variation = standard deviation / expected Return

coefficient of variation for trucks = 6% / 21% = 0.2857

2]

expected rate of return = geometric mean return of last 5 years

expected rate of return = ((1 + 5%) * (1 + 3%) * (1 + (-4%)) * (1 + 6%) * (1 + (-7%))^1/5 - 1

expected rate of return = 0.47%