Part 1: Assume that for a 5-year period, large-company stocks had annual rates o
ID: 2652410 • Letter: P
Question
Part 1:
Assume that for a 5-year period, large-company stocks had annual rates of return of 23.54 percent, -9.60 percent, -12.39 percent, -19.60 percent, and 31.39 percent. What is the variance of these returns?
0.0533
0.0565
0.0587
0.0499
Part 2:
A stock produced annual rates of return of 11 percent, -17 percent, 2 percent, and 14 percent over the past 4 years, respectively. What is the geometric average return for this period?
2.50 percent
1.86 percent
1.74 percent
2.23 percent
Part 3:
The stock of Blue Water Tours, Inc. is expected to return 14.50 percent in a boom economy, 9.50 percent in a normal economy, and lose 8.50 percent in a recessionary economy. What is the expected rate of return on this stock if there is a 5.00 percent chance the economy booms, and an 80.00 percent chance the economy will be normal?
7.05 percent
6.80 percent
5.88 percent
7.53 percent
Assume that for a 5-year period, large-company stocks had annual rates of return of 23.54 percent, -9.60 percent, -12.39 percent, -19.60 percent, and 31.39 percent. What is the variance of these returns?
Explanation / Answer
1 Year Return Return-Mean (Return-Mean)^2 1 23.54 20.87 435.64 2 -9.60 -12.27 150.50 3 -12.39 -15.06 226.74 4 -19.60 -22.27 495.86 5 31.39 28.72 824.95 Total 13.34 2133.70 Mean Total Return/n 2.67 Variance [(Return-Mean)^2]/n-1 533.43 Hence, answer is 0.0533 2 Year Return 1 11.00 2 -17.00 3 2.00 4 14.00 Geometric Mean= (1.11*0.83*1.02*1.14)^1/4= 1.017 3 Economy's State Return Probability Prob*Return Boom 14.5 0.05 0.73 Normal 9.5 0.80 7.60 Recession -8.5 0.15 -1.28 Total 7.05