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Consider the rate of return of stocks ABC and XYZ. Year r ABC r XYZ 1 25 % 31 % 2 2 14 3 11

Consider the rate of return of stocks ABC and XYZ.

Year rABC rXYZ
1 25 % 31 %
2 2 14
3 11 15
4 2 0
5 0 7

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?

  • 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 22%, 9%, 19%, 6%, or 1%, 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?

  • Arithmetic

  • Geometric

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