Consider the rate of return of stocks ABC and XYZ. Year rABC rXYZ
1 22 6
2 10 10
3 19 17
4 3 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?
c. Calculate the geometric average returns of each stock.
d-1. If you were equally likely to earn a return of 22%, 10%, 19%, 3%, or 1%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return?
d-2. If you were equally likely to earn a return of 36%, 10%, 17%, 0%, or -8%, in each year (these are the five annual returns for stock XYZ), what would be your expected rate of return?