Question

1. During the past five years, you owned two stocks that had the following annual rates of return:

Year	Stock A	Stock B
2013	-12%	-18%
2014	18%	23%
2015	22%	25%
2016	28%	22%
2017	-11%	2%

Required:

1. Compute the arithmetic mean annual rate of return for each stock.
2. Compute the standard deviation of the annual rate of return for each stock.
3. Compute the coefficient of variation for each stock.
4. Highlight four limitations of portfolio analysis.
   3. Ewert Company sells a Product P with sales occurring evenly throughout the year. The annual demand for Product P is 300,000 units and an order for new inventory is placed each month. Each order costs KES 40,000 to place. The cost of holding Product P in inventory is KES 15 per unit per year. Buffer (safety) inventory equal to 40% of one month’s sales is maintained.

Required:

Calculate the following values for Product P:

1. The total cost of the current ordering policy.

2. The total cost of an ordering policy using the economic order quantity.
3. The net cost or saving of introducing an ordering policy using the economic order quantity.
4. Highlight four limitations of the EOQ model.

Answer 1

a. 1. arithmetic mean annual rate of return for Stock A = (-0.12 + 0.18 + 0.22 + 0.28 - 0.11)/5 = 0.09 = 9%
arithmetic mean annual rate of return for Stock B = (-0.18 + 0.23 + 0.25 + 0.22 + 0.02)/5 = 0.108 = 10.8%

II. standard deviation Of Stock A = [((-0.12 - 0.09)^2 + (0.18 - 0.09)^2 + (0.22 - 0.09)^2 + (0.28 - 0.09)^2 +(-0.11 - 0.09)^2)/5]^(1/2)
= 0.1704 = 17.04%

standard deviation Of Stock b = [((-0.18 - 0.108)^2 + (0.23 - 0.108)^2 + (0.25 - 0.108)^2 + (0.22 - 0.108)^2 +(0.02 - 0.108)^2)/5]^(1/2)
= 0.1663 = 16.63%

III. Coefficietn of Variation = (standard deviation/arithmentic mean)*100
Coefficient of Variation of Stock A = (0.1704/0.09)*100 = 189.33%
Coefficient of Variation of Stock B = (0.1663/0.108)*100 = 153.98%