Rate of return, standard deviation, coefficient of variation Personal Finance Problem 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 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 1.14. Mike has obtained the following price information for the period 2015 through 2018: Hi-Tech stock, being growth-oriented, did not pay any dividends during these 4 years. a. Calculate the rate of return for each year, 2015 through 2018, 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 this 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? a. The rate of return for year 2015 is%. (Round to two decimal places.)
Rate of return, standard deviation, coefficient of variation Personal Finance Problem 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 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 1.14. Mike has obtained the following price information for the period 2015 through 2018: Hi-Tech stock, being growth-oriented, did not pay any dividends during these 4 years. a. Calculate the rate of return for each year, 2015 through 2018, 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 this 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? a. The rate of return for year 2015 is%. (Round to two decimal places.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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Transcribed Image Text:Rate of return, standard deviation, coefficient of variation Personal Finance Problem 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 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 1.14.
Mike has obtained the following price information for the period 2015 through 2018: Hi-Tech stock, being growth-oriented, did not pay any dividends during these 4 years.
a. Calculate the rate of return for each year, 2015 through 2018, 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 this 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?
a. The rate of return for year 2015 is %. (Round to two decimal places.)
C
Transcribed Image Text:Year
2015
2016
2017
2018
Stock price
Beginning
$14.87
$20.73
$63.21
$71.69
End
$20.73
$63.21
$71.69
$91.19
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