Problem+Set+6 - Problem Set 6 Chapter 24 4 Consider the...

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Problem Set 6: Chapter 24 4. Consider the rate of return on stocks ABC and XYZ. Year r ABC R XYZ 1 20% 30% 2 12 12 3 14 18 4 3 0 5 1 -10 a. Calculate the arithmetic average return on these stocks over the sample period. b. Which stock has greater dispersion around the mean? c. Calculate the geometric average returns of each stock. What do you conclude? d. If you were equally likely to earn a return of 20%, 12%, 14%, 3% or 1%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? What if the five possible outcomes were those of stock XYZ? 5. XYZ stock price and dividend history are as follows: Year Beginning-of-year Price Dividend paid at Year-End 2007 $100 $4 2008 120 4 2009 90 4 2010 100 4 An investor buys three shares of XYZ at the beginning of 2007, buys another two shares at the beginning of 2008, sells one share at the beginning of 2009, and sells all four remaining shares at the beginning of 2010. a. What are the arithmetic and geometric average time weighted rates of return for the investor?
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