06-14 - Chapter 6 Solution to Ch 06 P14 Build a Model a Use...

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Chapter 6. Solution to Ch 06 P14 Build a Model Data as given in the problem are shown below: Bartman Industries Reynolds Incorporated Market Index Year Stock Price Dividend Stock Price Dividend Includes Divs. 2007 $17.250 $1.150 $48.750 $3.000 11,663.98 2006 14.750 1.060 52.300 2.900 8,785.70 2005 16.500 1.000 48.750 2.750 8,679.98 2004 10.750 0.950 57.250 2.500 6,434.03 2003 11.375 0.900 60.000 2.250 5,602.28 2002 7.625 0.850 55.750 2.000 4,705.97 We now calculate the rates of return for the two companies and the index: Bartman Reynolds Index 2007 24.7% -1.1% 32.8% 2006 -4.2% 13.2% 1.2% 2005 62.8% -10.0% 34.9% 2004 2.9% -0.4% 14.8% 2003 61.0% 11.7% 19.0% Average 29.4% 2.7% 20.6% Use the function wizard to calculate the standard deviations. Bartman Reynolds Index Standard deviation of returns 31.5% 9.7% 13.8% On a stand-alone basis, it would appear that Bartman is the most risky, Reynolds the least risky. c. Now calculate the coefficients of variation Bartman, Reynolds, and the Market Index. Divide the standard deviation by the average return: Bartman Reynolds Index Coefficient of Variation 1.07 3.63 0.67 Reynolds now looks most risky, because its risk (SD) per unit of return is highest. a. Use the data given to calculate annual returns for Bartman, Reynolds, and the Market Index, and then calculate average returns over the five-year period. (Hint: Remember, returns are calculated by subtracting the beginning price from the
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