Realized rates of return Stocks A and B have the following historical returns:
Year Stock A's Returns, rA Stock B's Returns, rB
2001 (18.00%) (14.50%)
2002 33.00 21.80
2003 15.00 30.50
2004 (0.50) (7.60)
2005 27.00 26.30
a. Calculate the average rate of return for each stock during the period 2001 through
2005.
b. Assume that someone held a portfolio consisting of 50 percent of Stock A and
50 percent of Stock B. What would the realized rate of return on the portfolio have
been in each year? What would the average return on the portfolio have been
during this period?
c. Calculate the standard deviation of returns for each stock and for the portfolio.
d. Calculate the coefficient of variation for each stock and for the portfolio.
e. Assuming you are a riskaverse investor, would you prefer to hold Stock A, Stock B,
or the portfolio? Why?
a,b,c, & d)
k
A
k
B
Portfolio
2001
(18.00%)
(14.50%)
(16.25%)
2002
33.00
21.80
27.40
2003
15.00
30.50
22.75
2004
(0.50)
(7.60)
(4.05)
2005
27.00
26.30
26.65
Mean
11.30
11.30
11.30
Std. Dev.
20.79
20.78
20.13
Coef. Var.
1.84
1.84
1.78
e.
A riskaverse investor would choose the portfolio over either Stock A or Stock
B alone, since the portfolio offers the same expected return but with less risk.
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 Three '11
 gold
 Probability theory, Internal rate of return, Stock A

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