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Corporate Finance Canadian Ed: calculate rate of return, std deviation, coefficient

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Stock A and B have the following historical returns:

YEAR STOCK A'S RETURNS STOCK B'S RETURNS
1998 (18.00%) (14.50%)
1999 33.00% 21.80%
2000 15.00% 30.50%
2001 (0.50%) (7.60%)
2002 27.00% 26.30%

a)Calculate the average rate of return for each stock during the period 1998 through 2002.
b)Assume that an investor held a portfolio consisting of 35% of Stock A and 65% of Stock B. What would be i) the average return of the portfolio, and ii) the beta of the portfolio in each year, during the period 1998 through 2002?
c)Calculate the standard deviation of returns for each stock and for the portfolio.
d)Calculate the coefficient of variation for each stock and for the portfolio.
e)If you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio?

Solution Preview

YEAR STOCK A'S RETURNS STOCK B'S RETURNS

1998 (18.00%) (14.50%)(15.725)
1999 33.00% 21.80%)(25.72)
2000 15.00% 30.50%)(28)
2001 (0.50%) (7.60%)(5.115)
2002 27.00% 26.30%)(26.545)

a) Calculate the average rate of return for each stock during the period 1998 through 2002.

Average rate of return is the sum of the data values divided by the population.
A: [18 +33 +15 +0.5 +27]/5 = 18.7%
B: [15.5 + 21.8 +30.5 +7.6 +26.3]/5 = 20.34 %

b) Assume that an investor held a portfolio consisting of 35% of Stock A and 65% of Stock B. ...

Solution Summary

In 373 words, the solution includes calculations and explanations for the questions.

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