Question

4. Measuring standalone risk using realized 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.

Five years of realized returns for Falcon Freight Inc. (Falcon) are given in the following table:

	2012	2013	2014	2015	2016
Stock return	6.25%	4.25%	7.50%	10.50%	3.25%

Also note that:

1.	While Falcon was started 40 years ago, its common stock has been publicly traded for the past 25 years.
2.	The returns on Falcon's equity are calculated as arithmetic returns.

Given this return data, the average realized return on Falcon Freight Inc.’s stock is (19.68%, 15.88%, 12.70%, 6.35%)

The preceding data series represents (a sample, the population, the universe) of Falcon’s historical returns. Based on this conclusion, the standard deviation of Falcon’s historical returns is (3.8525%, 2.8537%, 2.5524%, 2.1973%)

If investors expect the average realized return on Falcon Freight Inc.’s stock from 2012 to 2016 to continue into the future, its expected coefficient of variation (CV) is expected to equal (0.5168, 0.3775, 0.8314, 0.4494)

Answer 1