Question

Historical Realized Rates of Return You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stock A and Stock B, have the following historical returns: Year ТА -17.10 % 2014 2015 2016 2017 2018 31.25 28.50 -6.25 31.75 -4.50 % 22.20 -15.60 48.20 17.85 a. Calculate the average rate of return for each stock during the 5-year period. Do not round intermediate calculations. Round your answers to two decimal places. % Stock A: Stock B: b. Suppose you had held a portfolio consisting 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 wou Round your answers to two decimal places. Negative values, if any, should be indicated by a minus sign. Year Portfolio 2014 2015 2016 2017 2018 Average return C. Calculate the standard deviation of returns for each stock and for the portfolio. Do not round intermediate calculations. Round your answers to two decimal places. FA FA Portfolio % Std. Dev. 0 % 0 % 0 d. Suppose you are a risk-averse investor. Assuming Stocks A and B are your only choices, would you prefer to hold Stock A, Stock B, or the portfolio? Why? A risk-averse investor should choose -Select- , since it offers -Select- expected return with -Select- risk.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B C D E -Nm 7 Year rA 2014 2015 2016 2017 2018 -17.10% 31.25% 28.50% -6.25% 31.75% rB -4.50% 22.20% -15.60% 48.20% 17.85% 00 9 a. Stock-A Stock-B Average Return 13.63% 13.63% 11 12 13 b. 14 15 Year 2014 2015 2016 2017 2018 Average return Portfolio's Return -10.80% 26.73% 6,45% 20.98% 24.80% 13.63% 22 c. A rB Portfolio 15.80% Std. Dev. 23.45% 24.85% 24 Portfolio d. 25 26 A risk-averse investor should choose since it offers expected return with Same Lowest risk.

Cell reference -

в C D Year TA rB van AwN- 2014 2015 2016 2017 2018 -0.171 0.3125 0.285 -0.0625 0.3175 -0.045 0.222 -0.156 0.482 0.1785 9 a Stock-A Stock-B Average Return =AVERAGE(C3:07) =AVERAGE(D3:07) 11 12 13 b. 14 Year | 15 16 | 17 18 2014 2015 2016 2017 2018 Average return Portfolio's Return =C3*50%+D3*50% =C4*50%+D4*50% =C5*50%+D5*50% =C6*50%+D6*50% =C7*50%+D7*50% =AVERAGE(C15:C19) 22 c. rB rA =STDEV.S(C3:07) Portfolio -STDEV.S(D3:07) -STDEV.S(C15:019) | Std. Dev. 24 A risk-averse investor should choose Portfolio 25 d. 26 since it offers expected return with Same Lowest risk.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.