- Calculate the average rate of return for each stock during the period 2x15 through 2x19. Assume tha someone 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 from 2x15 through 2x19? What would have been the average return on the portfolio during that period? . Calculate the standard deviation of returns for each stock. Assume the risk-free rate during this time was 3.5%. What are the Sharpe ratios for Stocks A and B ove this time period using their average returns?
- Calculate the average rate of return for each stock during the period 2x15 through 2x19. Assume tha someone 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 from 2x15 through 2x19? What would have been the average return on the portfolio during that period? . Calculate the standard deviation of returns for each stock. Assume the risk-free rate during this time was 3.5%. What are the Sharpe ratios for Stocks A and B ove this time period using their average returns?
Chapter2: The Domestic And International Financial Marketplace
Section: Chapter Questions
Problem 1P
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
REALIZED
Transcribed Image Text:Stocks A and B have the following historical returns:
Year
Stock A's Returns, ra
Stock B's Returns, re
2x15
-24.25%
5.50%
2x16
18.50%
26.73%
2x17
38.67%
48.25%
2x18
14.33%
-4.50%
2x19
39.13%
43.86%
a. Calculate the average rate of return for each stock during the period 2x15 through 2x19. Assume that
someone 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 from 2x15 through 2x19? What would have been the
average return on the portfolio during that period?
b. Calculate the standard deviation of returns for each stock.
c. Assume the risk-free rate during this time was 3.5%. What are the Sharpe ratios for Stocks A and B over
this time period using their average returns?
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