Risk return exercise
You are searching for a stock to add to your current stock portfolio. You are interested in? Hi-Tech Inc. ? You realize that any time you consider a technology? stock, it involves elevated risk. The rule you follow is to include only stocks with a coefficient of variation of returns below 1.02. You have obtained the following price information and dividend information:
Year Starting Price Ending price Quarterly Dividend
1 $40.00 $42.00 $0.50
2 $42.00 $47.40 $0.75
3 $47.40 $43.40 $1.00
4 $43.40 $53.40 $1.25
a. Calculate the annual rate of return for each year, 1 through 4, for Hi-Tech stock
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?