The following table shows the historical returns for large, Ask an Expert

Finance

The following table shows the historical returns for large company stocks from 1980-1999. Let's find the average return and the standard deviation of the large firm returns.

Data: Yearly Historical Returns for U. S. Large Company Stocks 1980-1999.

	Year	Large Company Stocks
	1980	32.61%			Step 1: Average Return
	1981	-4.97%
	1982	21.67%			Calculate the historical average return for large co. stocks
	1983	22.57%
	1984	6.19%			Use the Excel function: =average(cell range)/100
	1985	31.85%			We need to divide by 100 because the values are in per cent.
	1986	18.68%
	1987	5.22%			A. In cell J116 enter: = average(C108:C127)
	1988	16.58%
	1989	31.75%
	1990	-3.13%			Step 2: Return Distribution
	1991	30.53%
	1992	7.62%			Calculate the variance and standard deviation of large firm
	1993	10.07%			historical returns.
	1994	1.27%
	1995	37.80%			Variance is the average of the squared deviations from the mean.
	1996	22.74%			We calculate the deviation of each individual return from the mean (average), square those numbers, sum the squares, and then divide
	1997	33.43%
	1998	28.13%			by the number of returns minus one.
	1999	21.03%
					The standard deviation is the square root of the variance. It is in
					percentage form and is used to make comparisons.


	Year	Large Co. Return	Average Return	Deviation	Squared Deviation
1	1980	32.61%
2	1981	-4.97%
3	1982	21.67%
4	1983	22.57%				Steps for calculating standard deviation:
5	1984	6.19%
6	1985	31.85%				Hint: range means a row or column of cells
7	1986	18.68%
8	1987	5.22%				A. Enter the 1980-1999 historical average
9	1988	16.58%				from J116. Copy from year 1 to 20.
10	1989	31.75%
11	1990	-3.13%				B. Find the yearly deviation by subtracting
12	1991	30.53%				the average return from the Lg Co Ret.
13	1992	7.62%				Copy from year 1 to 20.
14	1993	10.07%
15	1994	1.27%				C. Find the squared deviation by multiplying
16	1995	37.80%				the deviation by itself. Copy.
17	1996	22.74%
18	1997	33.43%				D. In cell F153 enter: =sum(range)/(20-1)
19	1998	28.13%
20	1999	21.03%				E. In cell F154 take the square root of F153
	st dev			variance		Enter: = sqrt(F153)
				st dev


	F. We can use the built-in formula: in cell C153 enter: =stdev(range). C153 should be equal to F154 (13.13%).


Test Your Skills:

	Question 1:	A stock had annual returns of 9 percent, -5 percent, 14 percent, 16 percent, 11 percent, & 12 percent
		each for the past six years. What is the average return and standard deviation for this
		stock?

			Year	Return
			1
			2
			3
			4
			5
			6

		Average return
		Standard deviation


	Question 2:	A stock had annual returns of -1 percent, -5 percent, 0 percent, 16 percent, 25 percent, and 50 percent
		each for the past six years. What is the average return and standard deviation for this stock?

			Year	Return
			1
			2
			3
			4
			5
			6

		Average return
		Standard deviation

View complete question

Corporate Finance, Finance

Category:- Corporate Finance
Reference No.:- M9752071

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