Below are historical returns (%) of Wal-Mart (WMT) and XOMA Ltd. (XOMA) over the
ID: 2766681 • Letter: B
Question
Below are historical returns (%) of Wal-Mart (WMT) and XOMA Ltd. (XOMA) over the past five years.
Year 1 2 3 4
5
WMT 6 5 -2 1
-1
XOMA -5 -1 10 1
-7
Calculate arithmetic mean return of both stocks. Interpret the number.
WMT
(.06+.05-.02+.01-.01)/5= 0.018= 1.8%
XOMA
(-.05-.01+.1+.01-.07)/5= -0.004 = -0.4%
Calculate geometric mean return of both stocks. Interpret the number.
WMT
((1.06)(1.05)(0.98)(1.1)(0.99)1/5 ) -1
Calculate standard deviations of both stocks
Based on c., determine which stock is riskier.
Does the risk-return tradeoff hold in this case?
Im more interested how can interpret the number and which one is riskier and is the question from the risk return . help!
Year 1 2 3 4
5
WMT 6 5 -2 1
-1
XOMA -5 -1 10 1
-7
Calculate arithmetic mean return of both stocks. Interpret the number.
WMT
(.06+.05-.02+.01-.01)/5= 0.018= 1.8%
XOMA
(-.05-.01+.1+.01-.07)/5= -0.004 = -0.4%
Calculate geometric mean return of both stocks. Interpret the number.
WMT
((1.06)(1.05)(0.98)(1.1)(0.99)1/5 ) -1
Calculate standard deviations of both stocks
Based on c., determine which stock is riskier.
Does the risk-return tradeoff hold in this case?
Im more interested how can interpret the number and which one is riskier and is the question from the risk return . help!
Explanation / Answer
WMT Year Returns(%) (Return-Mean) (Return-Mean)^2 1 0.06 0.042 0.001764 2 0.05 0.032 0.001024 3 -0.02 -0.038 0.001444 4 0.01 -0.008 0.000064 5 -0.01 -0.028 0.000784 0.00508 Mean 0.018 SD 0.001016 1.80% XOMA Year Returns(%) (Return-Mean) (Return-Mean)^2 1 -0.05 -0.046 0.002116 2 -0.01 -0.006 0.000036 3 0.1 0.104 0.010816 4 0.01 0.014 0.000196 5 -0.07 -0.066 0.004356 0.01752 Mean -0.004 SD 0.003504 Standard deviation of XOMA is greater hence XOMA is riskier
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