Question

DePaul, Inc. You are searching for a stock to add to your current stock portfolio. You are interested in DePaul, 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 $40.00 $42.00 $0.50 $42.00 $47.40 $0.75 $47.40 $43.40 $1.00 $43.40 $53.40 $1.25 a. Calculate the annual rate of return for each year, 1 through 4, for DePaul 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 4 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?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

в с D E G H Year mo 1 2 Starting Price $40.00 $42.00 $47.40 $43.40 Ending Price | Quarterly Dividend $42.00 $0.50 $47.40 $0. 75 $43.40 $1.00 $53.40 $1.25 Annual Return 10.00% 2 0.00% 0.00% 34.56% Probability 25% 25% 25% | 4 25% 9 b. Average return 10 c. Standard deviation 11 d. Coefficient of variation 12 e Yes, as its CV is below 1.02 13 16.14% 12.77% 0.79 14

Cell reference -

D Year Starting Price 40 42 Nmnoco Ending Price Quarterly Dividend 0.5 47.4 0.75 43.4 53.4 1.25 a. Annual Return Probability =((D4-C4)+E4*4)/C4 =1/4 =((D5-C5)+E5*4)/C5 =1/4 =((D6-C6)+E6*4)/C6 =1/4 =((D7-C7)+E7*4)/7 =1/4 42 47.4 43.4 9 b. 10 c. 11 d. 12 e 13 Average return Standard deviation Coefficient of variation Yes, as its CV is below 1.02 =SUMPRODUCT(F4:F7,64:G7) =SQRT(SUMPRODUCT((C9-74:F7)^2,64:67)) =C10/09

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.