5. Measuring standalone risk using realized data Aa Aa Returns earned over a giv

Question

5. Measuring standalone risk using realized data Aa Aa Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock. Consider the case of Celestial Crane Cosmetics Inc. (CCC): Five years of realized returns for CCC are given in the following table. Remember: 1. While CCC was started 40 years ago, its common stock has been publicly traded for the past 25 years 2. The returns on its equity are calculated as arithmetic returns 3. The historical returns for CCC for 2012 to 2015 are: 20122013 2014 2015 2016 Stock return 8.75% 5.95% 10.50% 14.70% 4.55% Given the preceding data, the average realized return on CCC's stock is of CCC's historical returns. Based on this conclusion, the The preceding data series represents standard deviation of CCC's historical returns is If investors expect the average realized return from 2012 to 2016 on CCC's stock to continue into the future, its

Explanation / Answer

a)Calculation of average return: Average return= sum of return/5=(8.75+5.95+10.5+14.7+4.55)/5=8.89% Average return=8.89% b)Calculation of standard deviation: Return(%) (Return- average return) (Reurn- average return)^2 (b) 8.75 -0.14 0.0196 5.95 -2.94 8.6436 10.5 1.61 2.5921 14.7 5.81 33.7561 4.55 -4.34 18.8356 Total 63.85 Standard deviation= (63.85/5)^1/2 = (12.77)^1/2 = 3.57 Calculation of coefficient of variation: Coefficient of variation =standard deviation/expected return                                 = 3.57/8.89=0.40 Coefficient of variation =0.40

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