Stocks M and W have the following historical returns:
Year Stock M Stock W
2006 -18% -14.50%
2007 33% 21.80%
2008 15% 30.50%
2009 -0.50% -7.60%
2010 27% 26.30%
a. Calculate the average rate of return for each stock during the 5-year period.
b. Assume that you are planning to hold a portfolio consisting of 50% of Stock M and 50% of Stock W. What is the realized rate of return on the portfolio in each year?
c. What is the average return on the portfolio for the 5 year period?
d. What is the standard deviation of returns for each stock and for the portfolio?
e. Calculate the coefficient of variation for each stock and for the portfolio?
f. If you are a risk averse investor, assuming these are your only choices, would you prefer to hold Stock M, Stock W, or the portfolio? Why?