Question
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?
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ABC
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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?
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Arithmetic
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Geometric
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