Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock. Consider the case of Celestial Crane Cosmetics Inc. (CCC): Five years of realized returns for CCC are given in the following table. Remember: 1. While CCC was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on its equity are calculated as arithmetic returns. 3. The historical returns for CCC for 2014 to 2018 are: 2018 2014 17.50% 2015 11.90% 2016 21.00% 2017 29.40% Stock return 9.10% Given the preceding data, the average realized return on CCC's stock is The preceding data series represents of CCC's historical returns. Based on this conclusion, the standard deviation of CCC's historical returns is If investors expect the average realized return from 2014 to 2018 on CCC's stock to continue into the future, its coefficient of variation (CV) will be Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table: Stock Artemis Inc. Babish & Co. Cornell Industries Danforth Motors Percentage of Portfolio 20% 30% 35% Expected Return 8.00% 14.00% 13.00% Standard Deviation 27.00% 31.00% 34.00% 15% 5.00% 36.00% What is the expected return on Andre's stock portfolio? 8.32% 16.65% 14.99% 11.10% Suppose each stock in Andre's portfolio has a correlation coefficient of 0.4 (p = 0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the partially diversified four-stock portfolio is 32%, the portfolio's standard deviation (op) most likely is 32%. Ariel holds a $10,000 portfolio that consists of four stocks. Her investment in each stock, as well as each stock's beta, is listed in the following table: Stock Andalusian Limited (AL) Tobotics Inc. (TI) Western Gas & Electric Co. (WGC) Mainway Toys Co. (MTC) Investment Beta $3,500 0.80 $2,000 1.50 $1,500 1.15 $3,000 0.40 Standard Deviation 12.00% 11.50% 16.00% 22.50% Suppose all stocks in Ariel's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio? Tobotics Inc. Andalusian Limited Mainway Toys Co. Western Gas & Electric Co. Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk? Andalusian Limited Western Gas & Electric Co. Mainway Toys Co. Tobotics Inc. If the risk-free rate is 7% and the market risk premium is 8.5%, what is Ariel's portfolio's beta and required return? Fill in the following table: Beta Required Return Ariel's portfolio
