In: Finance
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
ANSWER IN THE IMAGE((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.
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