Question

Suppose you own two stocks, A and B. In year 1, stock A earns a 2% return and stock B earns a 9% return. In year 2, stock A earns an 18% return and stock B earns an 11% return. __________ has the higher arithmetic average return.

Answer 1

Answer:

Both the stock have the same expected return.

Step-by-step explanation:

In year 1 the return earned by stocks A and B are:

Stock A = 2% return

Stock B = 9% return

In year 2 the return earned by stocks A and B are:

Stock A = 18% return

Stock B = 11% return

Compute the expected return for stock A as follows:

$Expected\ return\ for\ A=\frac{2+18}{2}=10\%$

Compute the expected return for stock B as follows:

$Expected\ return\ for\ B=\frac{9+11}{2}=10\%$

Thus, both the stock have the same expected return.