Question

Historical Realized Rates of Return You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stock A and Stock B, have the following historical returns: Year 2014 2015 2016 2017 2018 -22.80% 39.25 24.75 -6.75 34.50 -5.50 % 20.30 -10.20 48.10 16.25 a. Calculate the average rate of return for each stock during the 5-year period. Do not round Intermediate calculations. Round your answers to two decimal places. Stock A: Stock B: b. Suppose you had 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? Do not round intermediate calculations. Round your answers to two decimal places. Negative values, if any, should be indicated by a minus sign Year Portfolio 2014 2015 2016 2017 2018 Average return c. Calculate the standard deviation of returns for each stock and for the portfolio. Do not round intermediate calculations. Round your answers to two decimal places. Portfolio Std. Der MacBook Pro

Answer 1

ra (%) 2014 -22.8 2015 39.25 2016 24.75 2017 -6.75 2018 34.5 rb (%) -5.5 20.3 -10.2 48.1 16.25 use the excel formula for avergae to calculate the average return a) Average retrun 13.79 13.79 If I would have held 50% of A and 50% of B the return would be = 0.5* Return A +.5* Return b ra (%) 2014 return each year 2015 2016 2017 2018 -22.8 39.25 24.75 -6.75 34.5 rb (%) -5.5 20.3 - 10.2 48.1 16.25 -14.15 29.78 7.28 20.68 25.38 Average return 13.79

To calculate the standard deviation of the portfolio, we will use the excel formula Wewill also require correlation between a and b to calcuate the standard deviation of the portfolio 2014 2015 2016 2017 2018 | ra (%) -22.8 39.25 24.75 -6.75 34.5 rb (%) -5.5 20.3 - 10.2 48.1 16.25 Standard deviation 27.19 23.31 Correlation -0.018 Standard deviation of the portfolio = ((0.5^2 *0.2719^2)+(0.5^2*0.2331^2)+(2*0.5*0.5*0.2719*0.2331*(-0.018)))^(1/2) 0.1775 17.75% A risk averse investors chooses the portfolio with lower risk He will choose to invest in the portfolio with 50% in A and 50% in B A risk averse investor will choose the portfolio because it offers the same return with lower risk.