1. During the last five years, you owned two stocks that had the following annual rates of returns:
|
Year
|
Stock T
|
Stock B
|
|
1
|
019
|
0.08
|
|
2
|
0.08
|
0.03
|
|
3
|
-.12
|
-0.09
|
|
4
|
-0.03
|
0.02
|
|
5
|
015
|
0.04
|
(a) Compute the arithmetic mean annual return for each stock. Which stock is most desirable according to this measure?
(b) Compute the standard deviation of the annual rate of return for each stock. Which stock is most desirable according to this measure?
(c) Compute the coefficient for variation for each stock. Which stock ismost desirable according to this measure?
(d) Compute the geometric mean rate of return for each stock. Discuss thedifference between the arithmetic mean return and the geometric mean return foreach stock. How do these differences seem to be related to the standard deviationof each stock?
2. You are considering acquiring shares of common stocks in the Madison Beer Corporation.
|
Possible rate of return
|
probability
|
|
-0.10
|
0.30
|
|
0.00
|
0.10
|
|
0.10
|
0.30
|
|
0.25
|
0.30
|
Compute the expected return on your investment in Madison Beer