Stock A and B have the following historical returns:

Year Stock As Returns, RA Stock Bs Returns, RB

1998 (18.0%) (14.5%)

1999 33.0% 21.8%

2000 15.0% 30.5%

2001 (0.5%) (7.6%)

2002 27.0% 26.3%

Calculate the average rate of return for each stock during the period 1998 through 2002.

Assume that someone held a portfolio consisting of 50 percent of Stock A and 50 percent of Stock B. What would have been the rate of return on the portfolio in each year from 1998 through 2002?

If the risk level of stock A is higher than stock B, would you prefer to hold Stock A or Stock B? Why?