FIN 486 Expect Success/uophelp.com FIN 486 Expect Success/uophelp.com | Page 8

Most likely 20% 20%
Optimistic 24% 30%
a. Determine the range of the rates of return for each of the two
projects.
b. Which project is less risky? Why?
c. If you were making the investment decision, which one would you
choose? Why? What does this decision imply about your feelings
toward risk?
d. Assume that expansion B’s most likely outcome is 21% per year
and that all other facts remain the same. Does your answer to part c
now change? Why?
P8–9 Rate of return, standard deviation, and coefficient of variation
Mike is searching for a stock to include in his current stock portfolio.
He is interested in Hi-Tech, Inc.; he has been impressed with the
company’s computer products and believes that Hi-Tech is an
innovative market player. However, Mike realizes that any time you
consider a technology stock, risk is a major concern. The rule he
follows is to include only securities with a coefficient of variation of
returns below 0.90.
Mike has obtained the following price information for the period 2012
through 2015. Hi-Tech stock, being growth-oriented, did not pay any
dividends during these 4 years.
Stock price
Year Beginning End
2012 $14.36 $21.55
2013 21.55 64.78
2014 64.78 72.38
2015 72.38 91.80