Questions on Mutual Fund Risk Measurement

1. During the past five years, you owned two stocks that had the following annual rates of return.
Year Stock T Stock B 1 0.19 0.08 2 0.08 0.03 3 -0.12 -0.09 4 -0.03 0.02 5 0.15 0.04
a) Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure? (5 marks)
b) Compute the standard deviation of the annual rate of return for each stock. By this measure, which is the preferable stock? (7 marks)
c) Compute the coefficient of variation for each stock. By this relative measure of risk, which stock is preferable? (3 marks)
d) Compute the geometric mean rate of return for each stock. Discuss the difference between the arithmetic mean return and the geometric mean return for each stock. Relate the differences in the mean returns to the standard deviation of the return for each stock. (5 marks)

2. a)What is meant by separability theorem? How does this contradict the “interior decorator” school of thought? (10 marks)

b) An investor is evaluating six portfolio with the following characteristics: Portfolio Portfolio Expected Portfolio Standard Return (%) Deviation (%) 1 19 8 2 25 12 3 16 6 4 32 16 5 22.5 10 6 8