Page 87 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes

Case Study Historical Return on Stock A and B

Stocks A and B have the following historical returns:

Year Stock A’s Return (K A) % Stock A’s Return (K B) %
2003 -12.24 -5.00
2004 23.67 19.55
2005 35.45 44.09
2006 5.82 1.20
2007 28.30 21.16

You are required to calculate the average rate of return for each stock during the period
2003 through 2007. Assume that someone held a portfolio consisting 50% of stock A and
50% of stock B. What would have been the average return on the portfolio during the
period? (You may assume that the year ended on 31 March.)
st
Solution:
Calculation of Average Rate of Return on Portfolio during 2003-2007.

Year Stock A’s Return (%) Stock A’s Return (%)
2003 -12.24 -5.00
2004 23.67 19.55
2005 35.45 44.09
2006 5.82 1.20
2007 28.30 21.16
81.00 81.00
Average Rate of Return 81/5 years =16.20% 81/5 years = 16.20%

Calculation of Realised Rate of Return on Portfolio during 2003-2007

Year Stock A Stock B Total Net
return
Proportion Return Net return (a) Proportion Return Net return (b)
(a)+(b)
2003 0.50 -12.24 -6.12 0.50 -5.00 -2.50 -8.62
2004 0.50 23.67 11.83 0.50 19.55 9.77 21.60
2005 0.50 35.45 17.72 0.50 44.09 22.04 39.76
2006 0.50 5.82 2.91 0.50 1.20 0.60 3.51
2007 0.50 28.30 14.15 0.50 21.16 10.58 24.73
81.00 40.49 81.00 80.98

Average Rate of Return = 80.98/5 = 16.20%

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