Question

3. Measuring stand-alone risk using realized (historical) data Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock. Consider the case of Happy Dog Soap Inc. (HDS): Five years of realized returns for HDS are given in the following table. Remember: 1. While HDS was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on its equity are calculated as arithmetic returns. 3. The historical returns for HDS for 2014 to 2018 are: 2014 8.75% 2015 5.95% 2016 10.50% 2017 14.70% 2018 4.55% Stock return Given the preceding data, the average realized return on HDS's stock is of HDS's historical returns. Based on this conclusion, the standard deviation of HDS's The preceding data series represents historical returns is If investors expect the average realized return from 2014 to 2018 on HDS's stock to continue into the future, its coefficient of variation (CV) will be

Answer 1

PAGE NO.: COATE: 1 2 (RŘ Year 2014 0.0196 2015 2016 Return (R) 8.75% 5.95% 10.50 % 14. 70 % 4.55 % 44.45% -0.14 - 2.94 1.61 5.81 -4.34 2017 2018 8.6436 2.5921 33.7561 18.8356 63. 847 n S - Average realized retum= { R = 44.45=R = 18.89 % Preceding data Series represents a sample of SHDS's historical returns - because we have only 5 year historical returns Standard deviation of historical return ECR-R2 - In-1 3. 847 – T he 4.00 % Coefficient of variation - Standard deviation meen of Archage 20004 return o 0.45