Historical Realized Rates of Return You are considering an investment in either
ID: 2726294 • Letter: H
Question
Historical Realized Rates of Return You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stocks A and B have the following historical returns:
a)Calculate the average rate of return for each stock during the 5-year period. Round your answers to two decimal places.
b)Suppose you had held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period? Round your answers to two decimal places.
c) Calculate the standard deviation of returns for each stock and for the portfolio. Round your answers to two decimal places. Enter negative returns with a minus sign.
**Please show calculation steps**
Year Ta Tb 2011 -20.30% -14% 2012 26% 20.70% 2013 10.25% 37.30% 2014 -2.75% -5.60% 2015 22.25% -2.95%Explanation / Answer
A./
AVERAGE RETURN OF STOCK A
= (-20.3% + 26% + 10.25% - 2.75% + 22.25%) / 5
= 7.09%
AVERAGE RETURN OF STOCK B
= (-14% + 20.70% + 37.3% - 5.62% - 2.95%) / 5
= 7.09%
B./
YEAR 2011 = (-20.3% * .5 -14% * .5)
= -17.15%
YEAR 2012 = (26% * .5 + 20.70% * .05)
= 23.35%
YEAR 2013 = (10.25% * .5 + 37.3% * .5)
= 23.78%
YEAR 2014 = (-2.75% * .5 - 5.6% * .5)
= -4.18%
YEAR 2015 = (22.25% * .5 - 2.95% * .5)
= 9.65%
AVERAGE RETURN ON PORTFOLIO
= (-17.15% +23.35% + 23.78% - 4.18% + 9.65%) / 5
= 7.09%
C./
STANDARD DEVIATION OF STOCK A
= SQUARE ROOT OF[D2 / (n - 1)]
= SQUARE ROOT OF [1444.45 / (5 - 1)]
= SQUARE ROOT OF 361.11
= 19%
STANDARD DEVIATION OF STOCK A
= SQUARE ROOT OF[D2 / (n - 1)]
= SQUARE ROOT OF [1804.5 / (5 - 1)]
= SQUARE ROOT OF 451.13
= 21.24%
NOTE- CORRELATION OF STOCK A & B REQUIRED FOR PORTFOLIO STANDARD DEVIATION CALCULATION
YEAR STOCK A RETURN (R) DEVIATION (D) D2 2011 -20.3 -27.39 750.21 2012 26 18.91 357.59 2013 10.25 3.16 9.99 2014 -2.75 -9.84 96.83 2015 22.25 15.16 229.83 TOTAL 1444.45Related Questions
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