Question

Consider the following annual returns of Estee Lauder and Lowe’s Companies: Estee Lauder Lowe’s Companies   Year 1 23.6 % ? 8.0 %   Year 2 ? 21.0 16.3   Year 3 17.8 4.4   Year 4 50.1 41.0   Year 5 ? 17.0 ? 11.0    Compute each stock’s average return, standard deviation, and coefficient of variation. (Round your answers to 2 decimal places.) Estee Lauder Lowe’s Companies   Average return % %   Standard deviation % %   Coefficient of variation                Which stock appears better?    Lowe’s Companies Estee Lauder

Answer 1

Solution:

Estee Lauder

Average return = (23.6 + (-21.0) + 17.8 + 50.1 + (-17))/5

Average return = 53.5/5

Average return = 10.7%

Standard deviation = ??(X - Average return)^2/(n - 1)

Standard deviation = ?2833.088/4

Standard deviation = 26.61%

Coefficient of variation = Standard deviation/Average return

Coefficient of variation = 0.2661/0.107

Coefficient of variation = 2.49

Lowe's companies

Average return = (-8 + 16.3+ 4.4 + 41.0 + (-11))/5

Average return = 42.7/5

Average return = 8.54%

Standard deviation = ??(X - Average return)^2/(n - 1)

Standard deviation = ?446.598/4

Standard deviation = 21.13%

Coefficient of variation = Standard deviation/Average return

Coefficient of variation = 0.2113/0.0854

Coefficient of variation = 2.47

Lowe's companies stock appears better because it has lowest coefficient of variation.