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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