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project is less risky? Why? c. If you were making the investment
decision, which one would you choose? Why? What does this
decision imply about your feelings toward risk? d. Assume that
expansion B’s most likely outcome is 21% per year and that all other
facts remain the same. Does your answer to part c now change? Why?
P8–9 Rate of return, standard deviation, and coefficient of variation
Mike is searching for a stock to include in his current stock portfolio.
He is interested in Hi-Tech, Inc.; he has been impressed with the
company’s computer products and believes that Hi-Tech is an
innovative market player. However, Mike realizes that any time you
consider a technology stock, risk is a major concern. The rule he
follows is to include only securities with a coefficient of variation of
returns below 0.90. Mike has obtained the following price information
for the period 2012 through 2015. Hi-Tech stock, being growth-
oriented, did not pay any dividends during these 4 years. Stock price
Year Beginning End 2012 $14.36 $21.55 2013 21.55 64.78 2014
64.78 72.38 2015 72.38 91.80 a. Calculate the rate of return for each
year, 2012 through 2015, for Hi-Tech stock. b. Assume that each
year’s return is equally probable, and calculate the average return over
this time period. c. Calculate the standard deviation of returns over the
past 4 years. (Hint: Treat these data as a sample.) d. Based on b and c,
determine the coefficient of variation of returns for the security. e.
Given the calculation in d, what should be Mike’s decision regarding
the inclusion of Hi-Tech stock in his portfolio? P8–10 Assessing
return and risk Swift Manufacturing must choose between two asset
purchases. The annual rate of return and the related probabilities
given in the following table summarize the firm’s analysis to this
point. Project 257 Project 432 Rate of return Probability Rate of
return Probability −10% 0.01 10% 0.05 10 0.04 15 0.10 20 0.05 20
0.10 30 0.10 25 0.15 40 0.15 30 0.20 45 0.30 35 0.15 50 0.15 40 0.10
60 0.10 45 0.10 70 0.05 50 0.05 80 0.04 100 0.01 a. For each project,
compute: (1) The range of possible rates of return. (2) The expected
return. (3) The standard deviation of the returns. (4) The coefficient of
variation of the returns. b. Construct a bar chart of each distribution of
rates of return. c. Which project would you consider less risky? Why?
P8–13 Portfolio return and standard deviation Jamie Wong is
considering building an investment portfolio containing two stocks, L