Question
In: Finance
Consider the rate of return of stocks ABC and XYZ. Year rABC rXYZ 1 22 %...
Consider the rate of return of stocks ABC and XYZ.
| Year | rABC | rXYZ | |||||||||
| 1 | 22 | % | 28 | % | |||||||
| 2 | 8 | 11 | |||||||||
| 3 | 10 | 19 | |||||||||
| 4 | 3 | 1 | |||||||||
| 5 | 1 | −15 | |||||||||
a. Calculate the arithmetic average return on these stocks over the sample period. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. Which stock has greater dispersion around the mean return?
-
XYZ
-
ABC
c. Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
d. If you were equally likely to earn a return of 22%, 8%, 10%, 3%, or 1%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
e. What if the five possible outcomes were those of stock XYZ? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
f. Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future performance?
-
Arithmetic
-
Geometric
Solutions
Expert Solution
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1. 
jeff jeffy answered 1 year agoRelated Solutions
The following table, contains annual returns for the stocks of ABC Corp. (ABC ) and XYZ...
The following table, contains annual returns for the stocks of
ABC Corp. (ABC ) and XYZ Corp. (XYZ ). The returns are
calculated using end-of-year prices (adjusted for dividends and
stock splits). Use the information for ABC Corp. (ABC ) and XYZ
Corp. (XYZ ) to create an Excel spreadsheet that calculates the
average returns over the 10-year period for portfolios comprised
of ABC and XYZ using the following, respective, weightings:
(1.0, 0.0), (0.9, 0.1). The average annual returns over...
1. The stocks on ABC Company and XYZ Company have the following returns over the last...
1. The stocks on ABC Company
and XYZ Company have the following returns over the last four
years.
Year
ABC returns
XYZ returns
1
-0.2
0.05
2
0.5
0.09
3
0.3
-0.12
4
0.1
0.2
a. Calculate the
average return on
ABC.
(1 mark)
b. Calculate the
average return on
XYZ.
(1 mark)
c. Calculate the
variance and standard deviation on the ABC returns.
(2.5 marks)
d. Calculate the
variance and standard deviation on the XYZ returns.
(2.5...
Jack has a portfolio with two stocks ABC and XYZ with the following parameters:
Jack has a portfolio with two stocks ABC
and XYZ with the following parameters: $ Invested Expected Return
Standard Deviation of Return ABC $4000 4.45% 8.23% XYZ $6000 7.96%
9.76% The correlation coefficient between ABC and XYZ is 0.40. A.
Compute expected return of the portfolio. B. Calculate covariance
of ABC and XYZ stock. C. Compute the standard deviation of the
portfolio.
Consider the following information on three stocks: Rate of Return If State OccursState of EconomyProbability of...
Consider the following information on three
stocks:
Rate of Return If State OccursState of
EconomyProbability of State
of EconomyStock AStock BStock CBoom
.20 .20 .32 .54 Normal
.45 .18 .16 .14 Bust
.35 .02 −.34 −.42
a-1 If your portfolio is invested 40 percent each in A and B
and 20 percent in C, what is the portfolio expected return? (Do
not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
Portfolio expected return
%
a-2 What is the variance? (Do...
Consider the following information on Stocks I and II: State of Probability of Rate of Return...
Consider the following information on Stocks I and II:
State of Probability of Rate of Return if State Occurs
Economy State of Economy Stock I Stock II
Recession .21 .015 ? .31
Normal .56 .325 .23
Irrational exuberance .23 .185 .41
The market risk premium is 11.1 percent, and the risk-free rate
is 4.1 percent.
Calculate the beta and standard deviation of Stock I. (Do not round
intermediate calculations. Enter the standard deviation as a
percent and round both answers...
Consider the following information on Stocks I and II: State of Probability of Rate of Return...
Consider the following information on Stocks I and II:
State of
Probability of
Rate of Return if State Occurs
Economy
State of Economy
Stock I
Stock II
Recession
.27
.030
?
.22
Normal
.62
.330
.14
Irrational exuberance
.11
.190
.42
The market risk premium is 11.2 percent, and the risk-free rate
is 4.2 percent.
Calculate the beta and standard deviation of Stock I. (Do
not round intermediate calculations. Enter the standard deviation
as a percent and round both answers...
Consider the following information on Stocks I and II: RATE OF RETURN IF STATE OCCURS...
Consider the following information on Stocks I and II:
RATE OF RETURN IF STATE OCCURS
STATE OF
ECONOMY
PROBABILITY OF
STATE OF ECONOMY
STOCK I
STOCK II
Recession
0.13
0.15
0.05
Normal
0.14
0.25
0.25
Irrational exuberance
0.73
0.29
0.43
The market risk premium is 11 percent, and the risk-free rate
is 6.05 percent.
For standard deviations: (Do not include the
percent signs (%). Round your answers to 2 decimal...
Consider the following information on Stocks I and II: State of Probability of Rate of Return...
Consider the following information on Stocks I and II:
State of
Probability of
Rate of Return if State Occurs
Economy
State of Economy
Stock I
Stock II
Recession
.22
.045
−
.37
Normal
.62
.355
.29
Irrational exuberance
.16
.215
.47
The market risk premium is 11.7 percent, and the risk-free rate
is 4.7 percent.
Calculate the beta and standard deviation of Stock I. (Do
not round intermediate calculations. Enter the standard deviation
as a percent and round both answers...
Consider the following rates of return: Year / Large Company Stocks / US Treasury Bill 1...
Consider the following rates of return: Year / Large Company
Stocks / US Treasury Bill 1 3.99 % 4.59 % 2 14.16 4.94 3 19.25 3.86
4 –14.43 6.99 5 –31.92 5.30 6 37.49 6.20 a. Calculate the
arithmetic average returns for large-company stocks and T-bills
over this period. b. Calculate the standard deviation of the
returns for large-company stocks and T-bills over this period. c-1
Calculate the observed risk premium in each year for the
large-company stocks versus the...
Return and Risk: Consider the following scenario: Rate of Return Scenario Prob. Stocks Bonds Recession .20...
Return and Risk: Consider the following scenario: Rate of Return
Scenario Prob. Stocks Bonds Recession .20 - 5% 14% Normal .60 15%
8% Boom .20 25% 4%___ 1. What is the expected return for each
investment? Bonds: Stocks: Portfolio (40% in bonds, 60% in
stocks):
2. What is the risk for each investment? Bonds: Stocks:
Portfolio (40% in bonds, 60% in stocks):
3. Which investment do you prefer? A. Bonds B. Stocks C.
Portfolio
4. Investors expect the market return...
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