Question

Cht1-Pre Lecture Quiz See Help Save & Exit Su 4 Problem 11-C Measuring Risk and Return Your Investment advisor belleves that recent stock returns should be given more consideration when calculating future returns and risk than older returns. The historical returns for Lately Lighthouse, Inc are given in the table below, along with the welghts that your advisor beleves are appropriate. Use the corresponding weights in all calculations 10 points Lately Weight Year Stock 12.32% 2012 5% eBook 2013 13.70% 15% 2014 7.90% 11.14% 20% 25% 35% Hint 2015 7.15% 2016 Print References a. What is the expected return for Lately Lighthouse, Inc.? (Enter your answer as a percent rounded to two decimal pleces) Expected retum b. What is the standard deviation of returns for Lately Lighthouse, Inc.? (Enter your answer as o percent rounded to twe decimal places.) Standard deviation 4 of 4 Mc Graw <Prev Next Instructions NPdoc e

Answer 1

a). Expected Return = $\sum_{i=1}^{n}$ [Weight(i) * Return(i)]

= [0.05 * 12.32%] + [0.15 * 13.70%] + [0.20 * 7.90%] + [0.25 * 11.14%] + [0.35 * 7.15%]

= 0.616% + 2.055% + 1.58% + 2.785% + 2.5025% = 9.5385%, or 9.54%

b). Standard Deviation = [$\sum_{i=1}^{n}${Weight(i) * (Expected Return - Return(i))²}]^1/2

= [{0.05 * (9.5385% - 12.32%)²} + {0.15 * (9.5385% - 13.70%)²} + {0.20 * (9.5385% - 7.90%)²} + {0.25 * (9.5385% - 11.14%)²} + {0.35 * (9.5385% - 7.15%)²}]^1/2

= [0.39%² + 2.60%² + 0.54%² + 0.64%² + 2.00%²]^1/2 = [6.16%²]^1/2 = 2.48%