# Compute the Arithmetic Annual Rate of Return

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.

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#### 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.