The following information is available concerning the historical risk and return relationships in the U.S. capital markets: U.S. CAPITAL MARKETS TOTAL ANNUAL RETURNS, 1990-2011 Investment Category Common stocks Treasury bills Long-term government bonds Long-term corporate bonds Real estate "Based on arithmetic mean. Arithmetic Mean 10.28% 3.54 5.10 5.95 9.49 Geometric Mean 8.81% 3.49 4.91 5.65 9.44 Standard Deviation of Returnª 16.9% 3.2 6.4 9.6 4.5 a. Explain why the geometric and arithmetic mean returns are not equal and whether one or the other may be more useful for investment decision making. b. For the time period indicated, rank these investments on a relative basis using the coef- ficient of variation from most to least desirable. Explain your rationale. c. Assume the arithmetic mean returns in these series are normally distributed. Calculate the range of returns that an investor would have expected to achieve 95 percent of the time from holding common stocks.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

What reforms to the financial system might reduce its exposure to systemic risk?

5.
The following information is available concerning the historical risk and return
relationships in the U.S. capital markets:
U.S. CAPITAL MARKETS TOTAL ANNUAL RETURNS, 1990-2011
Investment Category
Common stocks
Treasury bills
Long-term government bonds
Long-term corporate bonds
Real estate
Based on arithmetic mean.
Arithmetic
Mean
10.28%
3.54
5.10
5.95
9.49
Geometric
Mean
8.81%
3.49
4.91
5.65
9.44
Standard
Deviation
of Returnª
16.9%
3.2
6.4
9.6
4.5
a. Explain why the geometric and arithmetic mean returns are not equal and whether one
or the other may be more useful for investment decision making.
b. For the time period indicated, rank these investments on a relative basis using the coef-
ficient of variation from most to least desirable. Explain your rationale.
c. Assume the arithmetic mean returns in these series are normally distributed. Calculate
the range of returns that an investor would have expected to achieve 95 percent of the
time from holding common stocks.
Transcribed Image Text:5. The following information is available concerning the historical risk and return relationships in the U.S. capital markets: U.S. CAPITAL MARKETS TOTAL ANNUAL RETURNS, 1990-2011 Investment Category Common stocks Treasury bills Long-term government bonds Long-term corporate bonds Real estate Based on arithmetic mean. Arithmetic Mean 10.28% 3.54 5.10 5.95 9.49 Geometric Mean 8.81% 3.49 4.91 5.65 9.44 Standard Deviation of Returnª 16.9% 3.2 6.4 9.6 4.5 a. Explain why the geometric and arithmetic mean returns are not equal and whether one or the other may be more useful for investment decision making. b. For the time period indicated, rank these investments on a relative basis using the coef- ficient of variation from most to least desirable. Explain your rationale. c. Assume the arithmetic mean returns in these series are normally distributed. Calculate the range of returns that an investor would have expected to achieve 95 percent of the time from holding common stocks.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Investment in Stocks
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education