Comparing Two Stocks: Arithmetic Mean & Annual Rate of Return
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During the past five years, you owned two stocks that had the following annual rates of return:
Year Stock T Stock B
1 17.0% 7.0%
2 6.0% 2.0%
3 -10.0% -8.0%
4 -1.5% 1.5%
5 14.0% 5.0%
a. Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure?
b. Compute the standard deviation of the annual rate of return for each stock. By this measure, which is the preferable stock (lowest risk)?
c. Compute the coefficient of variation for each stock. By this relative measure of risk, which stock is preferable?
d. Compute the geometric mean rate of return 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.
The solution compares two stocks and determines the arithmetic mean and annual rate of return for each stock, as well as the coefficient of variation and geometric mean