During the past five years you owned two stocks that had the following annual rates of return:

Year Stock A Stock B
1 0.18 0.09
2 0.6 0.04
3 -0.15 -0.11
4 -0.01 0.04
5 0.11 0.05

a) compute the arithmetic annual rate of return for each stock. Which stock is most desirable by this measure?

b) Compute the standard deviation of th annual rate of return for each stock. (Use Chapter 1 Appendix if necessary). By this measure, which is the preferable stock?

c) Compute the coeficient of variation for each stock. By this relative measure of risk, which stock is preferable?

d) Compute the geometric mean rate of retrun for each stock. Discuss the difference between the arithmetic mean return and the geometric mean return for each stock.
Discuss the differences in the mean returns relative to the standard deviation of the return for each stock.

Solution Preview

During the past five years you owned two stocks that had the following annual rates of return:

Year Stock A Stock B
1 0.18 0.09
2 0.6 0.04
3 -0.15 -0.11
4 -0.01 0.04
5 0.11 0.05

a) compute the arithmetic annual rate of return for each stock. Which stock is most desirable by this measure?

Year Stock A Stock ...

Solution Summary

This solution provides steps to compute the arithmetic annual rate of return.

... d. Compute the geometric mean rate of return for each stock. ... The solution compares two stocks and determines the arithmetic mean and annual rate of return...

... the standard deviation of the annual rate of return... d. Compute the geometric mean rate of return for ... Discuss the difference between the arithmetic mean return...

... b) Compute the arithmetic and geometric rate of return for this stock over the past three years. Which is the most appropriate measure? 2. With an 8% annual...

1) From the following information, compute the average ... Average annual return denotes expected return from the asset ... Variance is the arithmetic mean (average) of ...

... The arithmetic and geometric returns for the stock are ... If Robb Computer applies the NPV decision rule, it ... These bonds make annual payments and mature 11 years ...

... expenses are estimated to be 40% of annual gross revenues. ... 1 = 8.5% , or you can use arithmetic mean, which ... 25; CF1=2.1; CF2=11.6; CF3=33.8 Compute IRR = 27.7%. ...

... risk factors, as such, I decided to compute only one ... use the geometric mean and not arithmetic mean for ... geometric mean better represents the annual average rate...

... This arithmetic process highlights the point that,as ... are not distinguishable and a moving average is computed. ... 05 Unilever Annual Report & Accounts and Form 20 ...