Mike has obtained the following price information for the period 2012 through 20
ID: 2650574 • Letter: M
Question
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 those 4 years.
Given the calculation in d, what should be Mike's decision regarding the inclusion of Hi-Tech stock in his portfolio?
Personal Finance Problem: Rate of return, standard deviation, 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 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 those 4 years.
Calculate the rate of return for each year, 2012 through 2015, for Hi-Tech stock. Assume that each year's return is equally probable, and calculate the average return over this time period. Calculate the standard deviation of returns over the past 4 years. (Hint: Treat these data as a sample.) Based on B and C, determine the coefficient of variation of returns for the security.Given the calculation in d, what should be Mike's decision regarding the inclusion of Hi-Tech stock in his portfolio?
Stock Price r (r - ? )² Year Beginning End Rate of returns Variance 2012 $14.36 $21.55 50.07% 0.0495 2013 $21.55 $64.78 200.60% 4.0242 2014 $64.78 $72.38 11.73% 0.0138 2015 $72.38 $91.80 26.83% 0.0720 Sum of returns 289.23% 4.1595 Sum of variances Average return (? ) 72.31% 3 Sample divisor (n -1) 1.3865 Variance 1.18% Standard deviation 1.6300 Coefficient of VariationExplanation / Answer
Answer:
The rule he follows is to include only securities with a coefficient of variation of returns below 0.90. and hence he shall not invest it the stock as it has a higher coefficient of variation (1.63)