Portfolio of stocks Solution (***** 100% Correct with Calculation *****)
Stocks A and B have the following historical returns:
Year Stock A’s Returns, r A Stock B’s Returns, r B
2006 (18.00%) (14.50%)
2007 33.00 21.80
2008 15.00 30.50
2009 (0.50) (7.60)
2010 27.00 26.30
a. calculate the average rate of return for each stock during the 5 yr period
b. Assume that someone held a portfolio consisting of 50% stock A and 50% of stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period?
c. Calculate the standard deviation of returns for each stock and for the portfolio
d. calculate the coefficient of variation for each stock and for the portfolio
c. if you are a risk-averse investor, then assuming these are you only choices, would you prefer to hold stock A, stock B of the portfolio.? Why?