FinancialManagement
Question 1 (a) 

Average rate of return per year = 

Total Stock price/ time 

Time 
Caswell 
Average rate of return per year 

  
  
$ 

1 
$ 9.00 
0 

2 
$ 14.00 
11.5 

3 
$ 10.00 
11 

4 
$ 7.00 
10 

5 
$ 9.00 
9.8 

Question 1 (b) 

Arithmetic ARR = 
(9+14+10+7+9)/5 

$9.80 

Question 1 (c) 

Geometric Average rate of return = 
((9*1)+(14*2)+(10*3)+(7*4)+(9*5))/(1+2+3+4+5) 

$9.33 

Question 1 (d) 

The geometric average rate of return describes the annual rate of return earned over the period in a better way than the arithmetic mean. Concepts of mean are very important in investment (Runkle, DeFusco, Anson, Pinto and McLeavey, 2013) 

Question 1 (e) 

Rate of return = 
current value – Original Value 

Original value 

(149) 

9 

55.56% 

Question 2 

A returns = (0.2*10%)+(0.6*16%)+(0.2*21%) 

15.80% 

A Std deviation = {(10% – 15.8%)^ 2(0.20) + (16% – 15.8%)^ 2 (0.60) + (21% – 15.8%)^ 2 (0.20)}^ ½ 

((5.8%^2)*(0.20) + (0.2%^ 2)* (0.60) + (5.2%^ 2)* (0.20))^0.5 

3.49% 

B returns =(0.1*7%)+(0.4*5%)+(0.4*13%) 

6.50% 

B Std deviation = {(7% – 6.5%)^ 2(0.10) + (5% – 6.5%)^ 2 (0.40) + (13% – 6.5%)^ 2 (0.40)}^ ½ 

6.00% 

When we consider rate of return, common stock A is better since it has a higher rate of return 
  

When we consider risk, common stock A is still better since it has a lower risk 

Question 3 

RR = (Dividend Received + (Closing price – purchase price)) / (purchase price) 

(0 +(283.99698.51))/698.51 

59.34% 

Rate of return on stock is = (Closing price – purchase price) / purchase price 

((283.99698.51)/698.51 

59.34% 

Question 4 

RR = (Dividend Received + (Closing price – purchase price)) / (purchase price) 

[(1.43 + (11.66 – $10.44)] / $10.44 

25.38% 

Rate of return on stock is = (Closing price – purchase price) / purchase price 

(11.66 – 10.44)] / 10.44 

11.69% 

Reference 

Runkle, D. E., DeFusco, R. A., Anson, M. J. P., Pinto, J. E., & McLeavey, D. W. (2013).Quantitative investment analysis. Hoboken, N.J: Wiley. 