FINS1613 Lecture Notes - Lecture 9: Expected Return, Summary Statistics, Standard Deviation

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aquamarinegoat534

2 Sep 2018

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Realised return: the perce(cid:374)t retur(cid:374) cha(cid:374)ge i(cid:374) a security"s value over a particular ti(cid:373)e period: To determine the cumulative return on a security over multiple time periods, we compound the returns for each individual period. Assume a stock returns r1 from t=0 to t=1, r2 from t=1 to t=2, and so on. Then, the realised return on the stock from t=0 to t=4 is: Arithmetic average return: describes return in an average year over a particular period. Serves as an estimate of the expected return: Geometric average return: describes the average compound return per year over a particular period. It is the constant per-period return such that the total return would be the same. It is not an estimate of the expected return due to reinvestment and compounding: Variance: measures return dispersion; how much returns vary around the average: Standard deviation: or volatility, is the square root of variance the risk.

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the common stock f the brangus Cattle company had the following end of year stock prices over the last 5 years no cash dividends.

Time Brangus cattle company

1 $17

2 12

3 11

4 22

5 29

A) Calculate the annual rate of return for each year from the above information

B) What s the arithmetic average rate of return earned by investing in Brangus cattle company stock over this period.

C) What is the geometric average rate of return earned by investing in Brangus cattle stock period

D) Which type of average rate of return best describe the average annual of return earned over the period ( arithmetic or geometric? Why

a) The annual rate of return at the end of the year 2 is ..% ( round to two decinal)

The annual rate of return at the end of the year 3 is ..% ( round two decimal)

The annual rate of return at the end of the year 4 is ..% ( round two decimal)

The annual rate of return at the end of the year 5 is ..% ( round two decimal)

b) The aritmetric average rate of return earned by investing in Brangus cattle stock over this period % ( round to two decinal)

c) The geometric average rate of return earned by investing in Brangus cattle stock over this period % ( round to two decinal)

d) Which type of average rate of return best describe the average annual rate of return earned over the period ( the arithmetic or geometric) why

a) Aritmetic average return best describes the average annual rate of return over period because it takes compound into account so it answers the question concerning the expected rate of return over a multi year period

b) Geometric average return best describe the average annual rate of return over a period because it is a simple average so it answer the question concerning the expected rate of return over multi year period.

c) Geometric average return best describe the average annual rate of return over a period because it takes compound so it answer the question concerning the expected rate of return over multi year period.

d) Aritmetic average return best describes the average annual rate of return over period because it is a simple average so it answers the question concerning the expected rate of return over a multi year per

apricotox859

Marsh Inc. had the followingâ end-of-year stock prices over the last five years and paid no cashâ dividends:

Time	Marsh
1	â$99
2	1414
3	1212
4	88
5	99

a. Calculate the annual rate of return for each year from the above information.

b. What is the arithmetic average rate of return earned by investing inâ Marsh's stock over thisâ period?

c. What is the geometric average rate of return earned by investing inâ Marsh's stock over thisâ period?

d. Considering the beginning and ending stock prices for theâ five-year period are theâ same, which type of average rate of returnâ (the arithmetic orâ geometric) better describes the average annual rate of return earned over theâ period?

mauvefish958

9. Calculating Returns and Variability [LO1] Youâve observed the following returns on Crash-n-Burn Computer's stock over the past five years: 7percent, -13 percent, 21 percent, 34 percent and 15 percent.

a. What was the arithmetic average return on Crash-n-Burn's stock over this five year period?

b. What was the variance of Crash-n-Burn's returns over this period? The standard deviation?

10. Calculating Real Returns and Risk Premiums [LO1] For problem 9, suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent.

a. What was the average real return on Crash-n-Burn's stock?

b. What was the average nominal risk premium on Crash-n-Burn's stock?

turquoiseherring221

FINS1613 Lecture Notes - Lecture 9: Expected Return, Summary Statistics, Standard Deviation

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