Required Rate of Return

Personal Finance Problem

P89 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 companys 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.

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

a. Calculate the rate of return for each year, 2012 through 2015, for Hi-Tech stock.

b. Assume that each years 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 Mikes decision regarding the inclusion

of Hi-Tech stock in his portfolio?