The holding Period Rate of Return (HPR) of stocks A, B, C for the past five year
ID: 2731856 • Letter: T
Question
The holding Period Rate of Return (HPR) of stocks A, B, C for the past five years are: Base on the information provided above, calculate the expected rate of return and standard deviation for each stock. Calculate coefficient of variation of each stock. If you only want to buy one stock, which one will you select? Why? Determine the correlation coefficient of returns of Stocks A and B stocks A and C and stocks B and C. Which portfolio do you recommend? Why? If you invest equally (50% each) on the stocks in your selected portfolio, calculate expected rate of return and standard deviation of this portfolio. Is this portfolio better than individual stock? Why?Explanation / Answer
1.
Stock A
Stock B
Stock C
Year
Return
(Return - Expected Return)^2
Return
(Return - Expected Return)^2
Return
(Return - Expected Return)^2
2012
25%
0.0100
2%
0.0009
20%
0.0169
2013
-10%
0.0625
8%
0.0009
-15%
0.0484
2014
40%
0.0625
1%
0.0016
30%
0.0529
2015
-5%
0.0400
12%
0.0049
-5%
0.0144
2016
25%
0.0100
2%
0.0009
5%
0.0004
Total
75%
0.1850
25%
0.0092
35%
0.1330
1a.Expected return (Total return/5)
15%
5%
7%
1b. Variance (Total / 4)
0.04625
0.0023
0.03325
1c. Standard deviation (Square root of variance)
21.51%
4.80%
18.23%
2. Coefficient of variation (Standard deviation/Expected return)
1.43
0.96
2.60
Stock A
Stock B
Stock C
Year
Return
(Return - Expected Return)^2
Return
(Return - Expected Return)^2
Return
(Return - Expected Return)^2
2012
25%
0.0100
2%
0.0009
20%
0.0169
2013
-10%
0.0625
8%
0.0009
-15%
0.0484
2014
40%
0.0625
1%
0.0016
30%
0.0529
2015
-5%
0.0400
12%
0.0049
-5%
0.0144
2016
25%
0.0100
2%
0.0009
5%
0.0004
Total
75%
0.1850
25%
0.0092
35%
0.1330
1a.Expected return (Total return/5)
15%
5%
7%
1b. Variance (Total / 4)
0.04625
0.0023
0.03325
1c. Standard deviation (Square root of variance)
21.51%
4.80%
18.23%
2. Coefficient of variation (Standard deviation/Expected return)
1.43
0.96
2.60
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