Stocks C and F have the following historical returns: Year return (HPY) of C return (HPY) of F 2016 −18.00% −14.50% 2017 33.00% 21.80% 2018 15.00 % 30.50% 2019 −0.50% −7.60% 2020 27.00% 26.30% Required Calculate the geometric rate of return for each stock during the 5-year period. Calculate the standard deviation of returns for each stock. Calculate the coefficient of variation for each stock. If you are a risk-averse investor then, assuming these are your only choices, discuss whether you would prefer to hold Stock C or Stock F.
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 C and F have the following historical returns:
Year return (HPY) of C return (HPY) of F
2016 −18.00% −14.50%
2017 33.00% 21.80%
2018 15.00 % 30.50%
2019 −0.50% −7.60%
2020 27.00% 26.30%
Required
- Calculate the geometric
rate of return for each stock during the 5-year period. - Calculate the standard deviation of returns for each stock.
- Calculate the coefficient of variation for each stock.
- If you are a risk-averse investor then, assuming these are your only choices, discuss whether you would prefer to hold Stock C or Stock F.
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