a. Assume the returns of a stock for the previous five years are as follows: 7%, 6%, 5%, - 4% and -3%? What is the historical standard deviation of the returns of this stock? If the returns are normally distributed, what is the range of returns expected using a 95% level of confidence? Explain the result to grandmother who is planning to purchase this stock for $25 and would like to sell it at the end of the year.
b. Explain the difference between geometric mean and arithmetic mean? Explain how the Blume formula can assist in forecasting the returns of a stock using historical returns data.
c. Explain the three forms of market efficiency and its significance as it relates to trading strategies.