End of year prices for XYZ over the past three years have been 100, 50, and 100
ID: 2623310 • Letter: E
Question
End of year prices for XYZ over the past three years have been 100, 50, and 100 respectively. The annual arithmetic mean return for XYZ during this time is ____. The annual geometric mean return for XYZ is:
0%, 0%
25%, 0%
25%, -25%
0%, -25%
None of the above.
You purchased a share of stock for $60. Three months later, you receive a dividend of $.60 and sell the share for $50. What is your holding period return?
1.20%
21.20%
-15.67%
-17.67%
e- None of the above.
My current portfolio has an expected return of 12% and a standard deviation of 24%. I am currently considering the addition of a security with an expected return of 10% and a standard deviation of 28%. Which of the following statements is TRUE?
Adding this security will reduce the expected return of my portfolio.
If the correlation between returns from the new security and returns from my existing portfolio is low enough, adding it may reduce the standard deviation of my portfolio.
Regardless of the correlation between returns from the new security and returns from my existing portfolio, adding it will increase the standard deviation of my portfolio.
a and b.
a and c.
a.0%, 0%
b.25%, 0%
c.25%, -25%
d.0%, -25%
e.None of the above.
Explanation / Answer
1. Return for year 2 = 50/100 - 1 = -50%
Return for year 3 = 100/50 - 1 = 100%
Arithmetic mean return = (-50% + 100%)/2 = 25%
Geometric mean return = (100/100)^(1/2) - 1 = 0%
So answer is choice (b) 25%,0%
2. Holding period return = (50+0.60)/60 - 1 = -15.67%
So answer is choice (c) -15.67%
3. As new security has lower return, adding it will lower expected return of portfolio.
Depending on correlation, adding it may reduce standard deviation.
So answer is choice (d) - a and b.
Hope this helped ! Let me know in case of any queries.
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