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REAUZED RATES OF RETURN Stocks A and B have the following historical returns: Year Stock A’s Returns, r A Stock B’s Returns, r B 2009 (18.00%) (14.50%) 2010 33.00 21.80 2011 15.00 30.50 2012 (0.50) (7.60) 2013 27.00 26.30 a. Calculate the average rate of return for each stock during the period 2009 through 2013. 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? What would the average return on the portfolio have been during this period? c. Calculate the standard deviation of returns for each stock and for the portfolio. d. Calculate the coefficient of variation for each stock and for the portfolio. e. Assuming you arc a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why?

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Fundamentals of Financial Manageme...

8th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285065137

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

8th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285065137
Chapter 8, Problem 20P
Textbook Problem
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REAUZED RATES OF RETURN Stocks A and B have the following historical returns:

Year Stock A’s Returns, rA Stock B’s Returns, rB
2009 (18.00%) (14.50%)
2010 33.00 21.80
2011 15.00 30.50
2012 (0.50) (7.60)
2013 27.00 26.30
  1. a. Calculate the average rate of return for each stock during the period 2009 through 2013.
  2. 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? What would the average return on the portfolio have been during this period?
  3. c. Calculate the standard deviation of returns for each stock and for the portfolio.
  4. d. Calculate the coefficient of variation for each stock and for the portfolio.
  5. e. Assuming you arc a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why?

a.

Summary Introduction

To determine: The average rate of return for each stock during the given period.

Portfolio:

The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by investors and financial users. A portfolio is constructed based on the risk tolerance and the objectives of the company.

The Required Rate of Return:

The required rate of return is the rate, which should be minimum earned on an investment to keep that investment running in the market. When the required return is earned, only then the users and the companies invest in that particular investment.

Explanation of Solution

Calculate the average rate of return for both of the stock.

The formula to calculate the average rate of return is,

Averagerateofreturn=SumofvalueofstocksNumberofstocks

Calculation of the average rate of return for stock A:

Substitute (18%), 33%, 15%, (0.5%) and 27% for value of stock A and 5 for the number of stocks in the above formula.

Averagerateofreturn=[(18%)+33%+15%+(0

b.

Summary Introduction

To determine: The realized rate of return on the portfolio for each year and the average return on portfolio for the given assumptions.

c.

Summary Introduction

To determine: The standard deviation of returns for each stock and for the portfolio.

d.

Summary Introduction

To determine: The coefficient of variation for each stock and for the portfolio.

The Coefficient of Variation:

The coefficient of variation is a tool to determine the risk. It determines the risk per unit of return. It is used for measurement when the expected returns are same for two data.

e.

Summary Introduction

To determine: The stock or the portfolio to be chosen and the reason for it.

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Chapter 8 Solutions

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
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Ch. 8 - PORTFOLIO BETA An individual has 35,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - EXPECTED AND REQUIRED RATES OF RETURN Assume that...Ch. 8 - BETA AND REQUIRED RATE OF RETURN A stock has a...Ch. 8 - EXPECTED RETURNS Stocks X and Y have the following...Ch. 8 - PORTFOLIO REQUIRED RETURN Suppose you are the...Ch. 8 - BETA COEFFICIENT Given the following information...Ch. 8 - REQUIRED RATE OF RETURN Stock R has a beta of 1.5,...Ch. 8 - CAPM AND REQUIRED RETURN Bradford Manufacturing...Ch. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 9%, rM = 14%...Ch. 8 - CAPM, PORTFOLIO RISK. AND RETURN Consider the...Ch. 8 - PORTFOLIO BETA Suppose you held a diversified...Ch. 8 - CAPM AND REQUIRED RETURN HR Industries (HRI) has a...Ch. 8 - CAPM AND PORTFOLIO RETURN You have been managing a...Ch. 8 - PORTFOLIO BETA A mutual fund manager has a 20...Ch. 8 - EXPECTED RETURNS Suppose you won the lottery and...Ch. 8 - EVALUATING RISK AND RETURN Stock X has a 10%...Ch. 8 - REAUZED RATES OF RETURN Stocks A and B have the...Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - EVALUATING RISK AND RETURN Bartman Industriess and...Ch. 8 - RISK AND RETURN Assume that you recently graduated...Ch. 8 - Begin by looking at the historical performance of...Ch. 8 - On the summary screen, you should sec an...Ch. 8 - Now lets take a closer look at the stocks of four...Ch. 8 - Select one of the four stocks listed in Question 3...Ch. 8 - Go back to the summary page to see an estimate of...Ch. 8 - What is the companys current dividend yield? What...Ch. 8 - Assume that the risk-free rate is 4% and the...Ch. 8 - Beta pf CPB company Beta of the MSI Company is...

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