Consider the rate of return of stocks ABC and XYZ

$.$

$$

Year rABC rXYZ

$1$

$2$

$0$

$\%$

$2$

$8$

$\%$

$2$

$8$

$1$

$1$

$$

$3$

$1$

$6$

$1$

$9$

$$

$4$

$4$

$1$

$$

$5$

$2$

$$

$9$

$$

a

$.$

$$Calculate the arithmetic average return on these stocks over the sample period.

$($

Round your answers to

$2$

$$decimal places.

$)$

b

$.$

$$Which stock has greater dispersion around the mean return?

multiple choice

$1$

ABC

XYZ

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

$2$

$0$

$\%$

$,$

$8$

$\%$

$,$

$1$

$6$

$\%$

$,$

$4$

$\%$

$,$

$$or

$2$

$\%$

$$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.

$)$

e

$.$

$$What if the five possible outcomes were those of stock XYZ

$?$

f

$.$

$$Given your answers to parts

$($

d

$)$

$$and

$($

e

$)$

$,$

$$which measure of average return, arithmetic or geometric, appears more useful for predicting future performance?

multiple choice

$2$

Arithmetic

Geometric