FIN 402 MASTER 1 Predictable World / fin402master.com FIN 402 MASTER 1 Predictable World / fin402master. | Page 19
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FIN 402 Week 2 Assignment Case Problem 4.2 The Risk-
Return Tradeoff Molly O’Rourke’s Stock Purchase Decision
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Case Problem 4.2 The Risk-Return Tradeoff: Molly O’Rourke’s
Stock Purchase Decision Over the past 10 years, Molly O’Rourke has
slowly built a diversified portfolio of common stock. Currently her
portfolio includes 20 different common stock issues and has a total
market value of $82,500. Molly is at present considering the addition
of 50 shares of either of two common stock issues—X or Y. To assess
the return and risk of each of these issues, she has gathered dividend
income and share price data for both over the last 10 years (2007–
2016). Molly’s investigation of the outlook for these issues suggests
that each will, on average, tend to behave in the future just as it has in
the past. She therefore believes that the expected return can be
estimated by finding the average HPR over the past 10 years for each
of the stocks. The historical dividend income and stock price data
collected by Molly are given in the accompanying table. Questions a.
Determine the HPR for each stock in each of the preceding 10
years. Find the expected return for each stock, using the approach
specified by Molly. b. Use the HPRs and expected return calculated in
question a to find the standard deviation of the HPRs for each stock
over the 10-year period. c. Use your findings to evaluate and discuss
the return and risk associated with stocks X and Y. Which stock
seems preferable? Explain. d.
Ignoring her existing portfolio, what
recommendations would you give Molly with regard to stocks X and
Y?