Stocks M and W have the following historical returns:
Year Stock M Stock W
2007 -19% -13.50%
2008 33% 22.75%
2009 16% 34.50%
2010 -0.30% -7.83%
2011 27% 23.30%
a. Calculate the average rate of return for each stock during the 5-year period.
b. Assume that you are planning to hold a portfolio consisting of 30% of Stock M and 70% of Stock W. What is the realized rate of return on the portfolio in each year?
c. What is the average return on the portfolio for the 5 year period?
d. What is the standard deviation of returns for each stock and for the portfolio?
e. Calculate the coefficient of variation for each stock and for the portfolio?
f. If you are a risk averse investor, assuming these are your only choices, would you prefer to hold Stock M, Stock W, or the portfolio? Why?
Solution depicts the steps to calculate average return, standard deviation and coefficient of variation of the given portfolio. Calculations are carried out with the help of suitable built-in formulas in MS Excel.