Question

Question 6 12 pts Consider the following annual returns (rounded) of Pepsi's common stock: 2014 2015 2016 2017 2018 Pepsi 14.01% 5.67% 4.71% 14.61% -7.87% a. Compute the average return, standard deviation, and coefficient of variation for Pepsi. Show your work. b. Coca-Cola Company during the same time period had an average return of 2.86%, a standard deviation of 5.07% and a coefficient of variation of 1.77. Comparing Pepsi and Coca-Cola Company, which stock is preferred? Explain. HTML Editore BIVA -A- IX EE 3 2 1 x x : - V DTT 12pt - Paragra

Answer 1

a)

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

B C D Year 2014 2015 2016 2017 2018 Pepsi's return 14.01% 5.67% 4.71% 14.61% -7.87% Average return Standard deviation Coefficient of variation 6.23% 9.11% 1.46

Cell reference -

B Year 2014 2015 2016 2017 2018 Pepsi's return 0.1401 0.0567 0.0471 0.1461 -0.0787 Average return Standard deviation Coefficient of variation =AVERAGE(C3:07) =STDEV.S(C3:07) =C10/09

b)

Pepsi is preferred.

Because coefficeint of variation of Pepsi (i.e 1.46) is lower than Coca-cola (i.e 1.77).

Coeffceint of variation indicates the risk raken for one unit return. A risk averse investor always prefer lower CV stocks.

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