Posted: January 14th, 2016

Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure?

During the past five years, you owned two stocks that had the following annual rates of return:

YEAR                             STOCK T                             STOCK B

1                                           0.19                                        0.08

2                                           0.08                                        0.03

3                                          -0.12                                       -0.09

4                                          -0.03                                         0.02

5                                           0.15                                         0.04

1. Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure?
2. Compute the standard deviation of the annual rate of return for each stock. (Use Chapter 1 Appendix if necessary.) By this measure, which is the preferable stock?
3. Compute the coefficient of variation for each stock. (Use the Chapter 1 Appendix if necessary.) By this relative measure of risk, which stock is preferable?
4. Compute the geometric mean rate of return for each stock. Discuss the difference between the arithmetic mean return and the geometric mean return for each stock. Discuss the differences in the mean returns relative to the standard deviation of the return for each stock.