Financial Management and Application Lecture#3 and 4 Risk

Question: Two stock prices for six days are given below.

Price APrice B
4560
5065
5461
4863
4161
4550

Calculate: 1. Average return of both stock

2. Standard deviation of each stock

3. Coefficient of Variation of each stock

4. Which stock is less risky based on Standard deviation?

5. Which stock you will select based on Coefficient of variation?

Solution:

For 1, 2 & 3:

Price -A (x)(x-Avg Return)(x-Avg Return)^2
45-2.1666666674.694444444
502.8333333338.027777778
546.83333333346.69444444
480.8333333330.694444444
41-6.16666666738.02777778
45-2.1666666674.694444444
Sum283Sum102.8333333
No.6No.6
Average return (283/6)47.16666667Variance (102.8333/6)17.13888889
S.D. (Sq. root of 17.138889)4.139914116
Co-efficient of Variation (4.1399/47.1666)*1008.78%
Price -B (x)(x-Avg Return)(x-Avg Return)^2
6000
65525
6111
6339
6111
50-10100
Sum360Sum136
No.6No.6
Average return (283/6)60Variance (102.8333/6)22.66666667
S.D. (Sq. root of 22.666666)4.760952286
Co-efficient of Variation (4.76095/60)*1007.93%

4)Based on Standard Deviation , Stock-A is less risky as it has lower standard deviation.

5)Based on Co-efficient of Variation , I will select Stock-B , as it has lower coefficient of variation.

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