P8–9 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 0.90.

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 these 4 years.

a. Calculate the rate of return for each year, 2012 through 2015, 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 these 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?

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Stock price Year Beginning End 2012 $14.36 $21.55 2013 21.55 64.78 2014 64.78 72.38 2015 72.38 91.80