Please answer the following and show all work. 2. You are considering buying sto
ID: 2778884 • Letter: P
Question
Please answer the following and show all work. 2. You are considering buying stocks for the first time and are looking for a single company in which you?ll make a substantial investment. You have narrowed your search to two firms Northwest Water Inc. and Bearcat Tech Corp. Northwest Water is a public utility supplying water to the count., and Bearcat Tech is a relatively new high-tech company in the computer field. Public utilities are classic examples of low-risk stocks because they arc regulated monopolies. That means the government gives them exclusive right to sell their product in an area but also controls pricing so they can?t take advantage of the public by charging excessively. The utility commission usually sets prices aimed at achieving a reasonable return for the company?s stockholders. On the other hand, young high-tech firms are classic examples of high-risk companies. That?s because new technical ideas can be enormously profitable, complete failures, or anything in between. You studied the history and prospects of both firms and their industries and with the help of your broker have made an estimate of the probability distribution of returns for each stock as follows: (a) Calculate the expected return for each stock. (b) Calculate the variance and standard deviation of the return on each stock. (c) Calculate the coefficient of variation for each stock?s return. (d) Which stock would you choose? Explain why.Explanation / Answer
Nort west water inc Return Probability Expected return Deviation from mean Square of deviation probability*square of deviation 4% 0.05 0.20% -4% 0.1600% 0.00008 6.00% 0.15 0.90% -2% 0.0400% 0.00006 8.00% 0.6 4.80% 0% 0.0000% 0 10.00% 0.15 1.50% 2% 0.0400% 0.00006 12.00% 0.05 0.60% 4% 0.1600% 0.00008 Mean 8% 0.03% Standard deviation 0.00001% Variance Bearcat tech corp 0.0035 Coefficient of variation Return Probability Expected return Deviation from mean Square of deviation probability*square of deviation -125% 0.15 -18.75% -133% 176.8900% 0.265335 0 0.2 0.00% -8% 0.6400% 0.00128 20% 0.3 6.00% 12% 1.4400% 0.00432 50% 0.2 10.00% 42% 17.6400% 0.03528 150% 0.15 22.50% 142% 201.6400% 0.30246 Mean 19% 60.87% Standard deviation 37.05% Variance 3.20 Coefficient of variation North west stock I will prefer as its less volatile and for risk averse investors Bearcat tech corp will give high return as its risk is high and its for risk loving investore