Problem:
Stocks M and W have the following historical returns:
Year Stock M Stock W
2007 -19% -13.50%
2008 33% 22.75%
2009 16% 34.50%
2010 -0.30% -7.83%
2011 27% 23.30%
Question 1: Calculate the average rate of return for each stock during the 5-year period.
Question 2: Assume that you are planning to hold a portfolio consisting of 30% of Stock M and 70% of Stock W. What is the realized rate of return on the portfolio in each year?
Question 3: What is the average return on the portfolio for the 5 year period?
Question 4: What is the standard deviation of returns for each stock and for the portfolio?
Question 5: Calculate the coefficient of variation for each stock and for the portfolio?
Question 6: If you are a risk averse investor, assuming these are your only choices, would you prefer to hold Stock M, Stock W, or the portfolio? Why?