8-20 REALIZED RATES OF RETURN Stocks A and B have the following historical returns: Year Stock A’s Returns, rA Stock B’s Returns, rB 2004 (18.00%) (14.50%) 2005 33.00 21.80 2006 15.00 30.50 2007 (0.50) (7.60) 2008 27.00 26.30 a. Calculate the average rate of return for each stock during the period 2004 through 2008. b. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would the realized rate of return on the portfolio have been each year? What would the average return on the portfolio have been during this period? c. Calculate the standard deviation of returns for each stock and for the portfolio. d. Calculate the coefficient of variation for each stock and for the portfolio. e. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why?
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