Response to the following problem:
Stocks A and B have the following historical returns:
|
Year
|
Stock A's Returns, rA
|
Stock B's Returns, rs
|
|
2002
|
(18.00%)
|
(14.50%)
|
|
2003
|
33.00
|
21.80
|
|
2004
|
15.00
|
30.50
|
|
2005
|
(0.50)
|
(7.60)
|
|
2006
|
27.00
|
26.30
|
a. Calculate the average rate of return for each stock during the 5-year period.
b. Assume that someone held a portfolio consisting of 50 percent of Stock A and 50 percent 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?
c. Calculate the standard deviation of returns for each stock and for the portfolio.
d. Calculate the coefficient of variation for each stock and for the portfolio.
e. If you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why?