FIN 486 CART Become FIN 486 Entire Course - Page 8

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