Over the past 10 years, Molly ORourke has slowly built a diversified portfolio of common stock. Currently her portfolio includes 20 different common stock issues and has a total market value of $82,500. Molly is at present considering the addition of 50 shares of either of two common stock issuesHarrys Pottery Inc. or Rons Rodents Corp. To assess the return and risk of each of these issues, she has gathered dividend income and share price data for both over the past 10 years (20102019). Mollys investigation of the outlook for these issues suggests that each will, on average, tend to behave in the future just as it has in the past. She therefore believes that the expected return can be estimated by finding the average annual HPR over the past 10 years for each of the stocks. The historical dividend income and stock price data collected by Molly are given in the accompanying table.

a. Determine the HPR for each stock in each of the preceding 10 years. Find the expected return for each stock, using the approach specified by Molly. Complete the table below for years 2014 to 2019 for both companies.using the following formula and calculate the average HPR. Fill in the blanks.

b. Use the HPRs and expected return calculated in question (a) to find the standard deviation of the HPRs for each stock over the 10-year period. The first 5 years are completed. The first 5 years are already calculated; fill in the blanks for years 2016 to 2019.

c. Use your findings and those given below (standard deviations and expected returns) to evaluate and discuss the return and risk associated with these two stocks. Which stock seems preferable? Explain WHY?

d. Ignoring her existing portfolio, what stock do you think Molly should buy?

Harry's Pottery Ron's Rodents Share Price Share Price Dividend Dividend Year Income Beginning Ending Income Beginning Ending 2010 $1.00 $20.00 $22.00 $1.50 $20.00 $20.00 2011 $1.50 $22.00 $21.00 $1.60 $20.00 $20.00 2012 $1.40 $21.00 $24.00 $1.70 $20.00 $21.00 2013 $1.70 $24.00 $22.00 $1.80 $21.00 $21.00 2014 $1.90 $22.00 $23.00 $1.90 $21.00 $22.00 2015 $1.60 $23.00 $26.00 $2.00 $22.00 $23.00 2016 $1.70 $26.00 $25.00 $2.10 $23.00 $23.00 2017 $2.00 $25.00 $24.00 $2.20 $23.00 $24.00 2018 $2.10 $24.00 $27.00 $2.30 $24.00 $25.00 2019 $2.20 $27.00 $30.00 $2.40 $25.00 $25.00 HPR for Harry's Pottery: (2) (3) (4) (2)-(3) (5) [(1) + (4)]/13) Current Income Ending Price Beginning Price Capital Gain HPR Year 2010 $1.00 $22.00 $20.00 $2.00 15.00% 2011 1.50 21.00 22.00 -1.00 2.27% 2012 1.40 24.00 21.00 3.00 20.95% 2013 1.70 22.00 24.00 -2.00 -1.25% 2014 1.90 23.00 22.00 1.00 2015 1.60 26.00 23.00 3.00 2016 1.70 25.00 26.00 -1.00 2017 2.00 24.00 25.00 -1.00 2018 2.10 27.00 24.00 3.00 2019 2.20 30.00 27.00 3.00 Average (expected) HPR for Harry's Pottery __ _% HPR for Ron's Rodents: (1) (2) (3) (4) (5) (2)-(3) [(1) + (4)]/(3) Current Ending Beginning Capital Year Income Price Price Gain HPR 2010 $1.50 $20.00 $20.00 $0.00 7.50% 2011 1.60 20.00 20.00 0.00 8.00% 2012 1.70 21.00 20.00 1.00 13.50% 2013 1.80 21.00 21.00 0.00 8.57% 2014 1.90 22.00 21.00 1.00 13.81% 2015 2.00 23.00 22.00 1.00 2016 2.10 23.00 23.00 0.00 2017 2.20 24.00 23.00 1.00 2018 2.30 25.00 24.00 1.00 2019 2.40 25.00 25.00 0.00 Average (expected) HPR for Ron's Rodents = % s= (1; -1)2 - N-1 Harry's Pottery: (1) Return (2) Average (3) (1)-(2) (4) (3)2 Example: Use your calculator for (4). Raise (3) to the power of 2. i.e. 3.36 raised to power of 2 = 10.63. Year Return, r Dar (ci-r)2 2010 15.00% 11.74% 3.26% 10.63% 2011 2.27 11.74 -9.47 89.68 2012 20.95 11.74 9.21 84.82 2013 -1.25 11.74 -12.99 168.74 2014 13.18 11.74 1.44 2.07 2015 20.00 11.74 8.26 68.23 2016 2.69 11.74 -9.05 2017 4.00 11.74 -7.74 2018 21.25 11.74 9.51 2019 19.26 11.74 7.52 712.97 Sx = 712.97 _79.22=8.90% 10-1 = Standard Deviation of Harry's Pottery Ron's Rodents: (1) Return (2) Average (3) (3) (1)-(2) (4) (3)2 la-r)2 Year Return, r nr 2010 7.50% 11.14% -3.64% 13.25% 2011 8.00 11.14 -3.14 9.86 13.50 11.14 2.36 5.57 2012 2013 8.57 11.14 -2.57 6.60 2014 11.14 2.67 7.13 13.81 13.64 2015 11.14 2.50 6.25 2016 9.13 11.14 -2.01 2017 13.91 11.14 2.77 2018 13.75 11.14 2.61 2019 9.60 11.14 -1.54 69.55 169 Sy=Vio - 1 = 27.73 = 2.78% = Standard Deviation of Ron's Rodents Summary statistics: Harry's Pottery Ron's Rodents Expected Return 11.74% 11.14% Standard Deviation 8.90% 2.78% Harry's Pottery Ron's Rodents Share Price Share Price Dividend Dividend Year Income Beginning Ending Income Beginning Ending 2010 $1.00 $20.00 $22.00 $1.50 $20.00 $20.00 2011 $1.50 $22.00 $21.00 $1.60 $20.00 $20.00 2012 $1.40 $21.00 $24.00 $1.70 $20.00 $21.00 2013 $1.70 $24.00 $22.00 $1.80 $21.00 $21.00 2014 $1.90 $22.00 $23.00 $1.90 $21.00 $22.00 2015 $1.60 $23.00 $26.00 $2.00 $22.00 $23.00 2016 $1.70 $26.00 $25.00 $2.10 $23.00 $23.00 2017 $2.00 $25.00 $24.00 $2.20 $23.00 $24.00 2018 $2.10 $24.00 $27.00 $2.30 $24.00 $25.00 2019 $2.20 $27.00 $30.00 $2.40 $25.00 $25.00 HPR for Harry's Pottery: (2) (3) (4) (2)-(3) (5) [(1) + (4)]/13) Current Income Ending Price Beginning Price Capital Gain HPR Year 2010 $1.00 $22.00 $20.00 $2.00 15.00% 2011 1.50 21.00 22.00 -1.00 2.27% 2012 1.40 24.00 21.00 3.00 20.95% 2013 1.70 22.00 24.00 -2.00 -1.25% 2014 1.90 23.00 22.00 1.00 2015 1.60 26.00 23.00 3.00 2016 1.70 25.00 26.00 -1.00 2017 2.00 24.00 25.00 -1.00 2018 2.10 27.00 24.00 3.00 2019 2.20 30.00 27.00 3.00 Average (expected) HPR for Harry's Pottery __ _% HPR for Ron's Rodents: (1) (2) (3) (4) (5) (2)-(3) [(1) + (4)]/(3) Current Ending Beginning Capital Year Income Price Price Gain HPR 2010 $1.50 $20.00 $20.00 $0.00 7.50% 2011 1.60 20.00 20.00 0.00 8.00% 2012 1.70 21.00 20.00 1.00 13.50% 2013 1.80 21.00 21.00 0.00 8.57% 2014 1.90 22.00 21.00 1.00 13.81% 2015 2.00 23.00 22.00 1.00 2016 2.10 23.00 23.00 0.00 2017 2.20 24.00 23.00 1.00 2018 2.30 25.00 24.00 1.00 2019 2.40 25.00 25.00 0.00 Average (expected) HPR for Ron's Rodents = % s= (1; -1)2 - N-1 Harry's Pottery: (1) Return (2) Average (3) (1)-(2) (4) (3)2 Example: Use your calculator for (4). Raise (3) to the power of 2. i.e. 3.36 raised to power of 2 = 10.63. Year Return, r Dar (ci-r)2 2010 15.00% 11.74% 3.26% 10.63% 2011 2.27 11.74 -9.47 89.68 2012 20.95 11.74 9.21 84.82 2013 -1.25 11.74 -12.99 168.74 2014 13.18 11.74 1.44 2.07 2015 20.00 11.74 8.26 68.23 2016 2.69 11.74 -9.05 2017 4.00 11.74 -7.74 2018 21.25 11.74 9.51 2019 19.26 11.74 7.52 712.97 Sx = 712.97 _79.22=8.90% 10-1 = Standard Deviation of Harry's Pottery Ron's Rodents: (1) Return (2) Average (3) (3) (1)-(2) (4) (3)2 la-r)2 Year Return, r nr 2010 7.50% 11.14% -3.64% 13.25% 2011 8.00 11.14 -3.14 9.86 13.50 11.14 2.36 5.57 2012 2013 8.57 11.14 -2.57 6.60 2014 11.14 2.67 7.13 13.81 13.64 2015 11.14 2.50 6.25 2016 9.13 11.14 -2.01 2017 13.91 11.14 2.77 2018 13.75 11.14 2.61 2019 9.60 11.14 -1.54 69.55 169 Sy=Vio - 1 = 27.73 = 2.78% = Standard Deviation of Ron's Rodents Summary statistics: Harry's Pottery Ron's Rodents Expected Return 11.74% 11.14% Standard Deviation 8.90% 2.78%