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 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. 20.40 % 43.25 20.50 -8.50 20.00 8.90 % 16.40 -10.70 51.90 6.15 Stock A 10.97 Stock B: 10.97 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 2014 Portfolio 2015 2016 2017 2018 Average return

Answer 1

Return on portfolio = Return on Stock A*Weight of Stock A + Return on Stock b*Weight of Stock B

2014: -20.4%*0.5 + -8.90%*0.5 = -14.65%

2015: 43.25*0.5 + 16.4*0.5 = 29.825%

2016: 20.50*0.5 -10.70*0.5 = 4.9%

2017: -8.5*0.5+51.90*0.5 = 21.7%

2018: 20*0.5 + 6.15*0.5 = 13.075%

Average Return = (-14.65+29.825+4.9+21.7+13.075)/5

= 10.97%