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# Corporate Investment Analysis

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I need help to solve some problems from book Corporate Investment Analysis - in FINANCE. Book from: Reilly, F. & brown, K. (2009). Investment Analysis and Portfolio Management (9th ed.). Mason, OH: South-Western/ Cengage Learning. Book used by Strayer University.

I need help to solve those problems: 4, 5, and 6

4). During the past five years, you owned two stocks that had the following annual rates of return:

Year Stock T Stock B
1 0.19 0.08
2 0.08 0.03
3 - 0.12 - 0.09
4 - 0.03 0.02
5 0.15 0.04

a. Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure?
b. Compute the standard deviation of the annual rate of return for each stock. (Use Chapter 1 Appendix if necessary.) By this measure, which is the preferable stock?
c. Compute the coefficient of variation for each stock. . (Use the Chapter 1 Appendix if necessary.) By this relative measure of risk, which stock is preferable?
d. Compute the geometric mean rate of return for each stock. Discuss the difference between the arithmetic mean return and the geometric mean return for each stock. Discuss the differences in the mean returns relative to the standard deviation of the return for each stock.

5). A stockbroker calls you and suggests that you invest in the Lauren Computer Company. After analyzing the firm's annual report and other material, you believe that the distribution of expected rates of return is as follows:

LAUREN COMPUTER CO.
Possible Rate of Return Probability
- 0.60 0.05
- 0.30 0.20
- 0.10 0.10
0.20 0.30
0.40 0.20
0.80 0.15

Compute the expected return [ E (Ri) ] on Lauren Computer stock.

6). Without any formal computations, do you consider Madison Beer in Problem 3 or Lauren Computer in Problem 5 to present greater risk? Discuss your reasoning.

#### Solution Preview

4). During the past five years, you owned two stocks that had the following annual rates of return:

Year Stock T Stock B
1 0.19 0.08
2 0.08 0.03
3 - 0.12 - 0.09
4 - 0.03 0.02
5 0.15 0.04

a. Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure?

Arithmetic mean annual rate of return = Total sum/No. of year

Stock T

Arithmetic mean annual rate of return = (0.19 + 0.08 - 0.12 - 0.03 + 0.15)/5 = 0.054 or 5.4%

Stock B

Arithmetic mean annual rate of return = (0.08 + 0.03 - 0.09 + 0.02 + 0.04)/5 = 0.016 or 1.6%

By this measure, Stock T is most desirable because it has higher arithmetic mean annual rate of return.

b. Compute the standard deviation of the annual rate of return for each stock. (Use Chapter 1 Appendix if necessary.) By this measure, which is the preferable stock?

Variance = &#425;p(r - µ)2 Standard deviation = &#8730;Variance

Stock T

Variance = ...

#### Solution Summary

This solution is comprised of a detailed explanation to compute the arithmetic mean annual rate of return for each stock.

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