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    Unit 3 Measurement Scale

    Uploaded by

    Mïçhäêł Jãkšî

    Copyright:

    © All Rights Reserved
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    Unit 3 Measurement Scale

    Uploaded by

    Mïçhäêł Jãkšî
    4 views4 pages

    Copyright

    © © All Rights Reserved

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    DOCX, PDF, TXT or read online from Scribd

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    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    4 views4 pages

    Unit 3 Measurement Scale

    Uploaded by

    Mïçhäêł Jãkšî

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 4

    RISK AND RETURN

    Cases

    1. A stock earns the following returns over a five year period: R1 = 0.30, R2 = -0.20, R3
    = -0.12, R4 = 0.38, R5 = 0.42, R6 = 0.36. Calculate the following: (a) arithmetic
    mean return, and (b) geometric mean return.

    Solution:

    R1 = 0.30, R2 = - 0.20, R3 = - 0.12, R4 = 0.38, R5 = 0.42, R6 = 0.36

    (a) Arithmetic mean

    0.30 – 0.20 - 0.12 + 0.38 + 0.42+0.36


    = = 0.19 or 19 %
    6

    (b) Geometric Mean

    = [(1.30) (0.80) (0.88) (1.38) (1.42) (1.36)]1/6 – 1 = 0.1602 or 16.02 %

    2. A stock earns the following returns over a five year period: R1 = 10 %, R2 = 16%, R3
    = 24 %, R4 = - 2 %, R5 = 12 %, R6 = 15%. Calculate the following: (a) arithmetic
    mean return, (b) cumulative wealth index, and (c) geometric mean return.

    Solution:

    R1 = 10 %, R2 = 16%, R3 = 24 %, R4 = - 2 %, R5 = 12 %, R6 = 15 %

    (a) Arithmetic mean


    10 + 16 + 24 - 2 + 12 + 15
    = = 12.5 %
    6

    (b) Geometric Mean


    = [(1.10) (1.16) (1.24) (0.98) (1.12) (1.15)]1/6 – 1 = 0.1222 or 12.22 %
    3. What is the expected return and standard deviation of returns for the stock described
    in 1?
    Solution:

    The expected return and standard deviation of returns is calculated below

    Return in % Deviation Square of deviation


    Period
    Ri (Ri-R) (Ri-R)2
    1 30 11 121
    2 -20 -39 1521
    3 -12 -31 961
    4 38 19 361
    5 42 23 529
    6 36 17 289
    19 SUM= 3782
    R=

    Expected return = 19 %
    Σ (Ri – R)2 3782
    Variance = = = 756.4
    n–1 6–1

    Standard deviation = (756.4)1/2 = 27.50

    4. What is the expected return and standard deviation of returns for the stock described in 2?

    Solution:
    The expected return and standard deviation of returns is calculated below.

    Return in % Deviation Square of deviation


    Period
    Ri (Ri-R) (Ri-R)2
    1 10 -2.5 6.25
    2 16 3.5 12.25
    3 24 11.5 132.25
    4 -2 -14.5 210.25
    5 12 -0.5 0.25
    6 15 2.5 6.25
    12.5 SUM= 367.5
    R=

    Expected return = 12.5 %


    Σ (Ri – R)2 367.5
    Variance = = = 73.5
    n–1 6–1

    Standard deviation = (73.5)1/2 = 8.57


    5. The probability distribution of the rate of return on a stock is given below:

    State of the Economy Probability of Occurrence Rate of Return


    Boom 0.20 30 %
    Normal 0.50 18 %
    Recession 0.30 9%

    What is the standard deviation of return?

    Solution:

    State of Probability Return in Deviation 2

    the of % (Ri-R) Pi x (Ri – R)


    occurrence pi x
    economy Ri Ri
    pi
    Boom 0.2 30 6 12.3 30.26
    Normal 0.5 18 9 0.3 0.05
    Recession 0.3 9 2.7 -8.7 22.71

    Expected return R = 17.7 SUM= 53.01


    Standard deviation = [53.01]1/2 =
    7.28

    6. The probability distribution of the rate of return on a stock is given below:

    State of the Economy Probability of Occurrence Rate of Return


    Boom 0.60 45 %
    Normal 0.20 16 %
    Recession 0.20 - 20%

    What is the standard deviation of return?

    Solution:

    Probability
    State of Return in
    of Deviation Pi x (Ri – R)2
    the % pi x Ri
    occurrence (Ri-R)
    economy Ri
    pi
    Boom 0.6 45 27 18.8 212.06
    Normal 0.2 16 3.2 -10.2 20.81
    Recession 0.2 -20 -4 -46.2 426.89
    Expected return R = 26.2 SUM= 659.76
    Standard deviation = [659.76]1/2 = 25.69

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