Consider the rate of return of stocks ABC and XYZ. Year rABC rXYZ 1 22 % 34 % 2 12 12 3 14 18 4 7 0 5 1 −8 a. Calculate the arithmetic average return on these stocks over the sample period. b. Which stock has greater dispersion around the mean return? A. XYZ C. ABC c. Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.) d. If you were equally likely to earn a return of 22%, 12%, 14%, 7%, or 1%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations.) e. What if the five possible outcomes were those of stock XYZ? f. Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future performance? A. Arithmetic B. Geometric
Unitary Method
The word “unitary” comes from the word “unit”, which means a single and complete entity. In this method, we find the value of a unit product from the given number of products, and then we solve for the other number of products.
Speed, Time, and Distance
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The amount earned or lost on the sale of one or more items is referred to as the profit or loss on that item.
Units and Measurements
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Consider the rate of return of stocks ABC and XYZ.
| Year | rABC | rXYZ | ||
| 1 | 22 | % | 34 | % |
| 2 | 12 | 12 | ||
| 3 | 14 | 18 | ||
| 4 | 7 | 0 | ||
| 5 | 1 | −8 | ||
a. Calculate the arithmetic average return on these stocks over the sample period.
b. Which stock has greater dispersion around the mean return?
A. XYZ
c. Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
d. If you were equally likely to earn a return of 22%, 12%, 14%, 7%, or 1%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations.)
e. What if the five possible outcomes were those of stock XYZ?
f. Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future performance?
A. Arithmetic
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