Question

3. Measuring stand-alone risk using realized (historical) data Returns earned over a given time period are called realired 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 Blue Llama Mining Inc. (BLM): Five years of realized returns for BLM are given in the following table. Remember: 1. While BLM 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 BLM for 2014 to 2018 are: Stock return 32.933 3053 2014 8.75% 2015 5.95% 2016 10.50% 2.90% 2017 14.70% 20.702854 2018 4.55% Stock return Given the preceding data, the average realized return on BLM's stock is The preceding data series represents of BLM's historical returns. Based on this conclusion, the standard deviation of BLM'S historical returns is If investors expect the average realized return from 2014 to 2018 on BLM's stock to continue into the future, its coefficient of variation (CV) will be

Answer 1

Average Realized Return = (0.0875 + 0.0595 + 0.1050 + 0.1470 + 0.0455)/5

Average Realized Return = 8.89%

It is a sample of historical returns,

Standard Deviation = [1/(5 – 1) (ri - 0.0889) 1/2

Standard Deviation = 0.03995

Standard Deviation = 4.00%