Question

You are searching for a stock to add to your current portfolio. You are interested in? Blackhawks, Inc. ? but are focused on elevated risk. You only buy securities with a coefficient of variation of returns below 1.0.   You have obtained the following price information and dividend information (10 points)….round to nearest one decimal place:

Year                      Starting Price             Ending price             Quarterly Dividend

      1                      $54.00                        $66.00                        $0.375

      2                      $66.00                        $70.60                        $0.500
      3                      $70.60                        $71.54                        $1.000

a.Calculate the rate of return for each? year, 1 through 3

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 3 years.

d.Based on b and c determine the coefficient of variation of returns for the security.

e.Does an investment in this stock fall within the parameters of your investment policy?

Answer 1

Rate of return for each year, Average annual return and standard deviation of return is calculated in excel and screen shot provided below:

Return in Year 1 is 22.92%, Return in year 2 is 7.73% and Return in year 3 is 2.75%.

b.

Average return is 11.13%.

c.

Standard deviation of return is 10.51%.

d.

coefficient of variation = Standard deviation / Average return

= 10.51% / 11.13%

= 0.94.

coefficient of variation of return is 0.94.

e.

Your basic  parameters of your investment policy is coefficient of variation of return should be less than 1. Here. coefficient of variation of return is 0.94 that is less than 1, so you investment fall withing your parameter.