REALIZED RATES OF RETURN Stocks A and B have the following historical returns: Year Stock A's Returns, rA Stock B's Returns, rB 2013 (18.00%) (14.50%) 2014 33 21.8 2015 15 30.50. 2016 0.50 7.60 2017 27 26.30 a. Calculate the average rate of return for each stock during the period 2013 through 2017b. Assume that someone held a portfolio consisting of 50% of Stock A and 50% ofstock B. What would the realized rate of return on the portfolio have been eachyear? What would the average return on the portfolio have been 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.e. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B,or the portfolio? Why?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
REALIZED
| Year | Stock A's Returns, rA | Stock B's Returns, rB |
| 2013 | (18.00%) | (14.50%) |
| 2014 | 33 | 21.8 |
| 2015 | 15 | 30.50. |
| 2016 | 0.50 | 7.60 |
| 2017 | 27 | 26.30 |
a. Calculate the average rate of return for each stock during the period 2013 through 2017
b. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of
stock B. What would the realized rate of return on the portfolio have been each
year? What would the average return on the portfolio have been 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.
e. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B,
or the portfolio? Why?
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