Problem
You are looking at two investments with the following historical returns:
Year 1 2 3 4 5
Stock A 10% 7% 15% -5% 8%
Stock B 6% 2% 5% 1% -2%
Task
1. Calculate the arithmetic average return and standard deviation for both investments.
2. If you invest $21,000 in Stock A and $9,000 in Stock B, what is the expected return on your portfolio?
3. A Government of Canada Bond with five years to maturity paying a semi-annual coupon of 6.5%, is currently yielding 7%. How much money should an investor pay for this bond? Assume the face value is $1,000 and ignore transaction costs.
4. An investor's marginal tax rate is 47% (total of federal, provincial and surtax) for ordinary income. For the Government of Canada Bond in part 3), how much tax would the investor have to pay in year 5?