Personal Finance Problem Rate of return, standard deviation, and coefficient of

Question

Personal Finance Problem 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 0.9 P8-9 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 YearBeginningEnd 2012$14.36L: 321.55 2013 2014 6478 201572.38 21.5564.78 72.38 91.80 a. Calculate the rate of returi for each year: 2012 through 2015, for Hi-Tech stock. b. Assume that cach years return is equally probable, and calculare the average re- tinu over this rime period Caleitlate the standard d these data as a sample Based on band c, determine the (Uer//c/17/r.,/ 27ith.,/ or rcrurns to ertation of returns over the past + years. Hint : Trear he ccu rirv d.

Explanation / Answer

Answer to part a

Rate of Return =( Price at the end - Price at the beginning) + Income Distribution / Price at the beginning

No dividend is distributed

Answer to part b

Answer to part c

Std deviation= Probability x (Given Return- Average Return)^2

= 61.32 = 7.8307

Answer to part d

Coefficient of variation = Std deviation / Average Return

= 7.8307/ 72.31 = .1083

Answer to part e

As Coefficient of variation of return is below .90 Mike will include the Hi-Tech stock in his portfolio.

Stock Price Year Beginning End Return 2012 $14.36 $21.55 50.07% 2013 $21.55 64.78 200.60% 2014 $64.78 72.38 11.73% 2015 $72.38 91.8 26.83%

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