As a finance major student, you have just landed a lucrative job as a Financial Planner with First Citizens Investment Services (FCIS), a major financial services company in your home country. Your first assignment is to help one of its major clients Solar Inc., invest in a high end stock. Solar Inc.’s CEO is impressed with Samsung’s performance over the years and have asked you to explore the possibility of including a Samsung stock in its current stock portfolio.
You have come up with the following historical information for Samsung.
BeginningPrice Ending Price Dividendpaid per year
2011 $68.20 $72.45 $45.00
2012 72.45 85.50 50.00
2013 85.50 98.74 58.00
2014 98.74 122.60 65.00
2015 122.60 136.85 70.00
A. Based on the above information, you are to examine the annual rate of return, the average return for the five year period (assuming that the probability of returns are equal for each year), the standard deviation of returns for the past five years and the coefficient of variations of returns. Based on your calculations, what advice can you give to Solar Inc. if the CEO has indicated that the company will only want to invest in a stock with a coefficient of variation of returns below 0.75.
Your employer was very impressed with your performance so far, and has granted you the privilege of helping Mr. TJ Welsh, a long standing client of the company, who is indecisive about which combination of assets to add to his portfolio. FCIS have been observing the performance of three assets for some time now, and have forecasted the following expected returns for the following three assets and asked you to make a determination on the best option for Mr. Welch.
Year Expected Return
Asset A Asset B Asset C
2017 16.00 17.00 14.00
2018 17.00 16.00 15.00
2019 18.00 15.00 16.00
2020 19.00 14.00 17.00
You have explored three options for Mr. Welsh which include:
(a) full 100 percent investment in Asset A,
(b) 50 percent in asset A and 50 percent in asset B,
(c) a 50 percent in asset A and 50 percent in asset C.
B. Given the above investment options, and the forecasted information, you were asked to determine the expected returns, standard deviation of returns and coefficient of variation of returns for each of the three options and provide your Manager with a recommendation for investment for Mr. Welsh. You must also provide the workings as part of your report and comment on the correlation for options AB and AC.