Returns on two stocks, A and B in a five business day week are as follows: Retur

Question

Returns on two stocks, A and B in a five business day week are as follows:

Returns

Day

Stock A

Stock B

01

20%

- 23 %

02

3 %

9%

03

- 18 %

7 %

04

11 %

31 %

05

7%

14 %

a.       Calculate average returns, variances, and standard deviations for stock A and B.

(6 * 1 = 6)

b.      Explain which stock is more risky referring to their variances and standard deviations.

(03)

c.       Calculate one-day holding period return, two day holding period return, three-day holding period return, four day holding period return and five day holding period return for stock A and B and fill up the following table.                                                                   (3* 1 = 3)

Returns (in %)

Day

Stock A

Stock B

1   - day Holding Period Return

3   - day Holding Period Return

5   - day Holding Period Return

Explanation / Answer

a) For Stock A :

Average returns = (20 + 3 - 18 + 11 + 7)/5 = 4.6 %

Variance = { (20-4.6)^2 + (3 -4.6)^2 + (-18-4.6)^2 + (11-4.6)^2 + (7-4.6)^2)}/5 = 159.44

Standar deviation = sqrt (Variance) = 12.63 %

For Stock B :

Average returns = (-23 + 9 + 7 + 31 + 14)/5 = 7.6 %

Variance = { (-23-7.6)^2 + (9-7.6)^2 + (7-7.6)^2 + (31-7.6)^2 + (14-7.6)^2)}/5 = 305.44

Standar deviation = sqrt (Variance) = 17.477 %

b) Stock B is more risky

c) For Stock A :

1 - day Holding Period Return = 20 %

3 - day Holding Period Return = (1+0.2)(1+0.03)(1-0.18) - 1 = 13.52 %

5 - day Holding Period Return = (1+0.2)(1+0.03)(1-0.18)(1+0.11)(1+0.07) - 1 = 20.375 %

FOR Stock B :

1 - day Holding Period Return = -23 %

3 - day Holding Period Return = (1-0.23)(1+0.09)(1+0.07) - 1 = -10.195 %

5 - day Holding Period Return = (1-0.23)(1+0.09)(1+0.07)(1+0.31)(1+0.14) - 1 = 34.11 %

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.