Problem: 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 a b
2009 -20.00% -5.00%
2010 42 15
2011 20 -13
2012 -8 50
2013 25 12
1) Calculate the average rate of return for each stock during the 5-year period
2) Suppose you had held a portfolio 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?
3) Calculate the standard deviation of returns for each stock and for the portfolio
4) If you are a risk-averse investor, then, assuming these are your only choices, would you prefer to hold stock A, Stock B, or the portfolio? Why?