2-2: Measuring Risk for Discrete Distributions Problem 2-13 Historical Realized
ID: 2712003 • Letter: 2
Question
2-2: Measuring Risk for Discrete Distributions
Problem 2-13 Historical Realized Rates of Return
You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stocks A and B have the following historical returns:
Year 2011 -18.40% -14.50%
2012 23.00 21.80
2013 10.50 29.10
2014 -1.50 -10.20
2015 23.75 11.15
Calculate the average rate of return for each stock during the 5-year period. Round your answers to two decimal places.
Stock A % =
Stock B % =
Suppose you had 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? What would have been the average return on the portfolio during this period? Round your answers to two decimal places.
Year Portfolio 2011 =
2012 =
2013 =
2014 =
2015 =
Average return % Calculate the standard deviation of returns for each stock and for the portfolio. Round your answers to two decimal places. Enter negative returns with a minus sign.
St.D rA =
St.D rB =
St.D Portfolio =
Suppose you are a risk-averse investor. Assuming Stocks A and B are your only choices, would you prefer to hold Stock A, Stock B, or the portfolio?
Explanation / Answer
Average Return = sum of returns/number of years
Standard deviation can be found out using the stdev function of excel.
Since, I am a risk averse investor, out of stocks A, B and the portfolio, I would choose the portfolio since it has the least risk (measured by standard deviation) and average returns are same for all three (7.47%). In other words, I would go for the portfolio since it has the highest reward/risk ratio.
A B 2011 -18.40% -14.50% 2012 23.00% 21.80% 2013 10.50% 29.10% 2014 -1.50% -10.20% 2015 23.75% 11.15% Average Return 7.47% 7.47%Related Questions
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