Returns for ECB and WCB over the last 5 years are shown below. What are the standard deviations, rates of return and coefficient of variation of these firms? If you are requested to invest in one of these companies, which company would you invest in. Justify your answer. (Hint: use the population standard deviation in your calculations). Year ECB WCB 2012 30.00% 32.00% 2013 -10.00% 14.00% 2014 35.00% -5.00% 2015 -5.00% -10.00% 2016 15.00% 30.00%
The returns can be tabulated as below
Year | ECB | WCB |
2012 | 30 | 32 |
2013 | -10 | 14 |
2014 | 35 | -5 |
2015 | -5 | -10 |
2016 | 15 | 30 |
Expected Return:
E(ECB)=(30-10+35-5+15)/5 =13%
E(WCB)= (32+14-5-10+30)/5 =12.2%
Standard Deviation:
stdev(ECB) = sqrt(sum of (Returns - E(ECB))^2)/n = 20.18% ( also can be calculated using stdev function in excel)
stdev(WCB) = sqrt(sum of (Returns - E(WCB))^2)/n = 19.37% ( also can be calculated using stdev function in excel)
Coefficient of variation:
CV =stddev/ Expected return
CV(ECB) =20.18%/13% =1.552
CV(WCB) =19.37%/12.2%= 1.58
Note: It will be better to invest in ECB. Eventhough std dev of WCB is slightly lesser than ECB, the coefficient of variation is lower for ECB and hence for given return risk is lower.
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