Five years of realized returns for HDS are given in the following table. Remembe
ID: 2811726 • Letter: F
Question
Five years of realized returns for HDS are given in the following table. Remember: 1. While HDS was started 40 years ago, its common stock has been publicly traded for the past 2 years 2. The returns on its equity are calculated as arithmetic returns. 3. The historical returns for HDS for 2012 to 2015 are: 2012 2013 2014 2015 2016 Stock return 8.75% 5.95% 10.50% 14.70% 4.5596 Given the preceding data, the average realized return on HDS's stock is 8.89% Based on economic conditions, you've compiled the following estimates of returns from HDS's stock and the probabilities associated with the economic condition for the next year: Market Condition Probability HDS's (ri) Boom Normal Recession 0.50 0.25 0.25 40% 24% -32% The standard deviation of returns for Happy Dog Soap's stock is ,IS : s.uu 04.60o If Investors expect the average realized return from 2012 to 2016 on HDS's stock to continue into the future, its coefficient of variation (v) will be - 6.16/2 Yo 3.333 83 Suppose you need to invest $10,000 in Happy Dog Soap Inc. or another company called Robonomics Corp. You know uat Robonomics Corp, has a coefficient of variation of 6.66, and you have calculated the coefficient of variation for HDS. To mak lysis, which e your investment decision, you spend some time analyzing the situation. Based on your ana of the following statements is true? Robonomics Corp. is two times more risky than Happy Dog Soap (HDS) Inc. py Dog Soap (HDS) Inc. is two times more risky than Robonomics Corp. oExplanation / Answer
standard deviation = square root (summation of(probablity *( HDS return - mean return)^2)
= square root ((.5 * (.4 - .18)^2) + (.25*(.24 - .18)^2) + (.25*(-.32 - .18)^2))
= 29.6090%
Coefficient of variation = standard deviation/average realized return
= 29.6090/8.89
= 3.33
Correct answer is Robonomics Corp is two times more risky than Happy Dog Soap (HDS) Inc.
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