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Chapter 5 Homework Pg. 217 5-3 Pg. 218 5-5. Pg. 217 5-3 Stocks A and B have the following historical returns: YearA’s ReturnsB’s Returns 1996-18.00%-14.50%

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Presentation on theme: "Chapter 5 Homework Pg. 217 5-3 Pg. 218 5-5. Pg. 217 5-3 Stocks A and B have the following historical returns: YearA’s ReturnsB’s Returns 1996-18.00%-14.50%"— Presentation transcript:

1 Chapter 5 Homework Pg. 217 5-3 Pg. 218 5-5

2 Pg. 217 5-3 Stocks A and B have the following historical returns: YearA’s ReturnsB’s Returns 1996-18.00%-14.50% 199733.00%21.80% 199815.00%30.50% 1999-0.50%-7.60% 200027.00%26.30%

3 Pg. 217 5-3  Calculate the average return for each stock during the period 1996 through 2000.  Assume that someone held a portfolio consisting of 50% of Stock A and 50% Stock B. What would have been the realized rate of return on the portfolio in each year from 1996 through 2000? What would have been the average return on the portfolio for this period?  Calculate the Standard deviation of returns for each stock and for the portfolio.  Calculate the coefficient of variation for each stock and the portfolio.

4 Pg. 217 5-3.5(k A )+.5(k B ) =Average(num1,num2,…) =STDEV(num1,num2,…) Or CV=Risk/Return

5 Pg. 217 5-3 e. If you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why? The risk-averse investor would choose the portfolio since it offers the same return for less risk.

6 Pg. 218 5-5 Stocks X and Y have the following probability distributions of expected future returns: ProbabilityXY 0.1-10%-35% 0.220 0.41220 0.22025 0.13845

7 Pg. 218 5-5  Calculate the expected rate of return for Stock Y. (k X =12%)  Calculate the standard deviation of expected returns for Stock X. (  y = 20.35.) Now calculate the coefficient of variation for Stock Y. Is it possible that most investors might regard Stock Y as being less risky than Stock X? Why?

8 Pg. 218 5-5 = Probability x Expected Return 

9 Pg. 218 5-5

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