1. Measuring stand-alone risk using realized (historical) data Returns earned over a given time period...
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1. Measuring stand-alone risk using realized (historical) data
Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock.
Consider the case of Blue Llama Mining Inc. (BLM):
Five years of realized returns for BLM are given in the following table. Remember:
1.
While BLM was started 40 years ago, its common stock has been publicly traded for the past 25 years.
2.
The returns on its equity are calculated as arithmetic returns.
3.
The historical returns for BLM for 2014 to 2018 are:
2014
2015
2016
2017
2018
Stock return
23.75%
16.15%
28.50%
39.90%
12.35%
Given the preceding data, the average realized return on BLMs stock is . ??
The preceding data series represents of BLMs historical returns. Based on this conclusion, the standard deviation of BLMs historical returns is .
If investors expect the average realized return from 2014 to 2018 on BLMs stock to continue into the future, its coefficient of variation (CV) will be .
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