[1

[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 ?