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[1.]
Consider the rate of return of stocks ABC and XYZ.
Year rABC rXYZ
1 22% 38%
2 9% 11%
3 19% 19%
4 6% 0%
5 1% -11%
a). Calculate the arithmetic average return on these stocks over the sample period. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Arithmetic Average
ABC ____________ %
XYZ ____________ %
b). Which stock has greater dispersion around the mean return?
XYZ or ABC ?
c). Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Geometric Average
ABC ____________ %
XYZ ____________ %
d). If you were equally likely to earn a return of 22%, 9%, 19%, 6%, or 1%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Expected rate of return ___________ %
e). What if the five possible outcomes were those of stock XYZ? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Expected rate of return __________ %
f). Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future performance?
Arithmetic or Geometric ?
a). Arithmetic average return for ABC = 11.40%
For XYZ = 11.40%
b). Standard deviation for ABC = 8.85%
For XYZ = 18.69%
Stock XYZ has a greater dispersion around the mean return
c). Geometric return for ABC = 11.12%
For XYZ = 10.16%
d). Expected rate of return for ABC = 11.40%
e). Expected rate of return for XYZ = 11.40%
f). Arithmetic average return appears more useful for predicting future performance in refrence to expected rate of return.
