Question

Liz Chapa manages a portfolio of 250 common stocks. Her staff compiled the following rate of return performance statistics for two new stocks: Stock Mean Standard Deviation Salas Products, Inc. 15% 5% Hot Boards, Inc. 20% 5% What is the coefficient of variations for both stocks

Answer 1

The coefficient of variation for Salas Products, Inc. is 33.33%, and for Hot Boards, Inc. it is 25%, indicating Hot Boards, Inc. offers more stable returns in relation to its risk.

Step-by-step explanation:

The coefficient of variation (CV) for a stock provides a measure of the risk per unit of return. It is calculated as the standard deviation of the stock's returns divided by the mean of the stock's returns. To find the CV for Salas Products, Inc. and Hot Boards, Inc., we use the following formula: CV = Standard Deviation / Mean.

For Salas Products, Inc. with a mean of 15% and a standard deviation of 5%, the CV is calculated as follows:

CV = 5% / 15% = 0.3333 or 33.33%

Similarly, for Hot Boards, Inc. with a mean of 20% and a standard deviation of 5%, the CV is calculated as:

CV = 5% / 20% = 0.25 or 25%

Thus, despite both stocks having the same standard deviation, Hot Boards, Inc. has a lower CV, indicating it provides a relatively more stable return in relation to its risk compared to Salas Products, Inc.

Answer 2

Answer: See explanation

Step-by-step explanation:

The coefficient of variations for both stocks will be calculated thus:

For Salas Product

Coefficient of Variation = Standard deviation / Mean × 100

= 5/15 × 100

= 1/3 × 100

= 33.33%

Hot boards:

Coefficient of Variation = Standard deviation / Mean × 100

= 5/20 × 100

= 1/4 × 100

= 25%