Stocks A and B have the following historical returns: Year Stock A's Returns, ra Stock B's Returns, ra 2016 (18.60%) (14.50%) 2017 34.25 20.40 2018 14.75 39.90 2019 (1.00) (9.70) 2020 26.75 20.05 a. Calculate the average rate of return for each stock during the period 2016 through 2020. Round your answers to two decimal places. Stock A: 11.23 % Stock B: 11.23 % b. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would the realized rate of return on the portfolio have been each year? Round your answers to two decimal places. Negative values should be indicated by a minus sign. Year Portfolio 2016 -16.55 % 2017 27.33 2018 27.33 % 2019 -5.35 2020 23.40 What would the average return on the portfolio have been during this period? Round your answer to two decimal places. 11.23 c. Calculate the standard deviation of returns for each stock and for the portfolio. Round your answers to two decimal places. Stock A Stock B Portfolio Standard Deviation d. Calculate the coefficient of variation for each stock and for the portfolio. Round your answers to two decimal places. Stock A Stock B Portfolio CV e. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Portfolio
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.
Stocks A and B have the following historical returns:
Year
Stock A's Returns, ra
Stock B's Returns, ra
2016
(18.60%)
(14.50%)
2017
34.25
20.40
2018
14.75
39.90
2019
(1.00)
(9.70)
2020
26.75
20.05
a. Calculate the average
Stock A:
11.23
%
Stock B:
11.23
%
b. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would the realized rate of return on the portfolio have been each year? Round your answers to two decimal places. Negative values should be indicated by a minus sign.
Year
Portfolio
2016
-16.55
%
2017
27.33
2018
27.33
%
2019
-5.35
2020
23.40
What would the average return on the portfolio have been during this period? Round your answer to two decimal places.
11.23
c. Calculate the standard deviation of returns for each stock and for the portfolio. Round your answers to two decimal places.
Stock A
Stock B
Portfolio
Standard Deviation
d. Calculate the coefficient of variation for each stock and for the portfolio. Round your answers to two decimal places.
Stock A
Stock B
Portfolio
CV
e. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio?
Portfolio
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