Consider the rate of return of stocks ABC and XYZ.

Year	rABC		rXYZ
1	23	%	30	%
2	8		10
3	10		17
4	3		0
5	3		10

a. Calculate the arithmetic average return on these stocks over the sample period. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Which stock has greater dispersion around the mean return?

multiple choice 1

• XYZ

• ABC

c. Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

d. If you were equally likely to earn a return of 23%, 8%, 10%, 3%, or 3%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

e. What if the five possible outcomes were those of stock XYZ? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

f. Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future performance?

multiple choice 2

• Arithmetic

• Geometric