Question

Historical Realized Rates of Return

Stocks A and B have the following historical returns:

Year
2012	-23.00%	-17.10%
2013	26.00	27.00
2014	10.75	20.80
2015	-2.25	-13.60
2016	31.50	25.90

1. Calculate the average rate of return for each stock during the 5-year period. Round your answers to two decimal places.

   Stock A	%
   Stock B	%

2. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period? Round your answers to two decimal places.

   Year	Portfolio
   2012	%
   2013	%
   2014	%
   2015	%
   2016	%
   Average return	%

3. Calculate the standard deviation of returns for each stock and for the portfolio. Round your answers to two decimal places.

   	rA	rB	Portfolio
   Std. Dev.	%	%	%

4. If you are a risk-averse investor then, assuming these are your only choices, would you prefer to hold Stock A, Stock B, or the portfolio?
   
   -Select-Stock AStock BPortfolioItem 12

Answer 1

K6 А | - B Year E F G H 1 (A) 2012 fi C Stock A -23.00% 26.00% 10.75% -2.25% 31.50% 2013 D Stock B -17.10% 27.00% 20.80% -13.60% 25.90% 2014 2015 2016 43.00% 43.00% Total Years Avg Return 8.600% 8.600% Year 2012 2013 2014 2015 2016 Stock A -23.00% 26.00% 10.75% -2.25% 31.50% Weight Weighted ReturnStock B 50.00% -11.50% -17.10% 50.00% 13.00% 27.00% 50.00% 5.38% 20.80% 50.00% -1.13% -13.60% 50.00% 15.75% 25.90% Weight Weighted Return Total Weighted Return 50.00% -8.55% -20.05% 50.00% 13.50% 26.50% 50.00% 10.40% 15.78% 50.00% -6.80% -7.93% 50.00% 12.95% 28.70% 43.00% 43.00% 43.00% 19 Total 20 Years 21 Avg Return 8.600% 8.600% 22

(C)

E F G L M Year Q13 A B 1 Year Stock A 2012 -23.00% 3 2013 26.00% 2014 10.75% 5 2015 -2.25% 6 2016 31.50% 7 8 Total 43.00% 9 Years 5 10 Avg Returi 8.600% 11 12 Variance = 13 Std dev = C D Retrun - AR (Retrun - AR)^2 -31.600% 9.986% 17.400% 3.028% 2.150% 0.046% -10.850% 1.177% 22.900% 5.244% 2012 2013 2014 2015 2016 Stock B Retrun - AR (Retrun - AR)^2 -17.10% -25.700% 6.605% 27.00% 18.400% 3.386% 20.80% 12.200% 1.488% - 13.60% -22.200% 4.928% 25.90% 17.300% 2.993% 19.481% 43.00% 19.400%) Total Years Avg Return 8.600% 19.481%/ (5-1) Sqrt(Var) 4.87% 22.07% Variance = Std dev = 19.40% / (5-1) Sqrt(Var) 4.85% 22.02% 14 18 15 Year Portfolio Retrun - AR (Retrun - AR)^2 16 2012 -20.05% -28.650% 8.208% 17 2013 26.50% 17.900% 3.204% 2014 15.78% 7.180% 0.516% 19 2015 -7.93% -16.530% 2.732% 20 2016 28.70% 20.100% 4.040% 21 22 Total 43.00% 18.700% 23 Years 5 24 Avg Returi 8.600% 25 26 Variance = 18.70% / (5-1) 27 Std dev = Sqrt(Var) 0.04675 21.62%

(D) We should prefer Portfolio as its Return is Equal but Standard Deviation is less as compared to stock A or Stock B So it is less risky