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