Chapter 5 Homework

Pg. 217 5-3

Pg. 218 5-5

Pg. 217 5-3

Stocks A and B have the following historical returns:
Year
1996
1997
1998
1999
2000

As Returns
-18.00%
33.00%
15.00%
-0.50%
27.00%

Bs Returns
-14.50%
21.80%
30.50%
-7.60%
26.30%

Pg. 217 5-3

Calculate the average return for each stock during the

period 1996 through 2000.
Assume that someone held a portfolio consisting of 50% of
Stock A and 50% Stock B. What would have been the
realized rate of return on the portfolio in each year from
1996 through 2000? What would have been the average
return on the portfolio for this period?
Calculate the Standard deviation of returns for each stock
and for Year
the portfolio.
Stock A
Stock B Portfolio
Calculate
the coefficient
of variation
stock and the
1996
-18.00%
-14.50%for each
-16.25%
portfolio.
1997
1998
1999
2000
Average
Std De v
C oef. Var.

33.00%
15.00%
-0.50%
27.00%
11.30%
20.79%
1.84

21.80%
30.50%
-7.60%
26.30%
11.30%
20.78%
1.84

27.40%
22.75%
-4.05%
26.65%
11.30%
20.13%
1.78

Pg. 217 5-3

Year
1996
1997
1998
1999
2000
Average
Std Dev
Coef. Var.

Stock A Stock B Portfolio

-18.00% -14.50% -16.25%
27.40%
33.00%
21.80%
22.75%
15.00%
30.50%
-4.05%
-0.50%
-7.60%
26.65%
27.00%
26.30%
11.30%
11.30%
11.30%
20.79%
20.78%
20.13%
1.84
1.84
1.78

.5(kA)+.5(kB)

=Average(num1,num2,)

=STDEV(num1,num2,)
Or
n
2

CV=Risk/Return

k
t 1

n 1

AVG

Pg. 217 5-3

e. If you are a risk-averse investor,
would you prefer to hold Stock A,
Stock B, or the portfolio? Why?
The risk-averse investor would choose
the portfolio since it offers the same
return for less risk.

Pg. 218 5-5

Stocks X and Y have the following probability
distributions of expected future returns:
Probability
X
Y
0.1
-10%
-35%
0.2
2
0
0.4
12
20
0.2
20
25
0.1
38
45

Pg. 218 5-5

Probability
0.1
0.2
0.4
0.2
0.1

Calculate the expected rate of return for Stock Y. (kX=12%)

Calculate the standard deviation of expected returns for Stock
X. (y = 20.35.) Now calculate the coefficient of variation for
Stock Y. Is it possible that most investors might regard Stock
Y as being less risky than Stock X? Why?
X
-10%
2%
12%
20%
38%
k^x =

XAVG
-1%
0%
5%
4%
4%
12%

(kX-k^X) (kX-k^X)2Prj
-22%
0.48%
-10%
0.20%
0%
0.00%
8%
0.13%
26%
0.68%
2X=
1.49%
X=
12.20%
CVX=
1.02

Y
YAVG (kY-k^Y) (kY-k^Y) 2Prj
-35%
-4%
-49%
2.40%
0%
0%
-14%
0.39%
20%
8%
6%
0.14%
25%
5%
11%
0.24%
45%
5%
31%
0.96%
2Y=
k^Y= 14%
4.14%
Y=
20.35%
CVY=
1.45

Pg. 218 5-5

Probability
0.1
0.2
0.4
0.2
0.1

X
-10%
2%
12%
20%
38%

XAVG
-1%
0%
5%
4%
4%

Y YAVG
-35% -4%
0%
0%
20% 8%
25% 5%
45% 5%

k^x=

12%

k^Y= 14%
= Probability x Expected Return

Pg. 218 5-5

Probability
0.1
0.2
0.4
0.2
0.1

X
-10%
2%
12%
20%
38%

XAVG (kX-k^X)

k^x=

12%

-1%
0%
5%
4%
4%

(kX-k^X)2 Pr j

-22%
-10%
0%
8%
26%

0.48%
0.20%
0.00%
0.13%
0.68%

2X=

1.49%

X=

12.20%

CVX=

1.02

^
^ 2
Y YAVG (kY-k Y) (kY-k Y) Pr j
-49%
2.40%
-35% -4%
-14%
0.39%
0%
0%
6%
0.14%
20% 8%
11%
0.24%
25% 5%
31%
0.96%
45% 5%
2Y=
k^Y= 14%
4.14%

Y=
CVY=

20.35%
1.45

Pg. 218 5-5

Probability
0.1
0.2
0.4
0.2
0.1

X
-10%
2%
12%
20%
38%

XAVG (kX-k^X)

k^x=

12%

-1%
0%
5%
4%
4%

(kX-k^X)2 Pr j

-22%
-10%
0%
8%
26%

0.48%
0.20%
0.00%
0.13%
0.68%

2X=

1.49%

X=

12.20%

CVX=

1.02

^
^ 2
Y YAVG (kY-k Y) (kY-k Y) Pr j
-49%
2.40%
-35% -4%
-14%
0.39%
0%
0%
6%
0.14%
20% 8%
11%
0.24%
25% 5%
31%
0.96%
45% 5%
2Y=
k^Y= 14%
4.14%

Y=
CVY=

20.35%
1.45