Please answer A B C and D. Show all work. Thank you in advance. 2. You are consi

Question

Please answer A B C and D. Show all work. Thank you in advance. 2. You are considering buying stocks for the first time and are looking for a single company in which you'll make a substantial investment. You have narrowed your search to two firms- Northwest Water Inc. and Bearcat Tech Corp. Northwest Water is a public utility supplying water to the county, and Bearcat Tech is a relatively new high-tech company in the computer field. Public utilities are classic examples of they are regulated monopolies. That them exclusive right to sell their product in an area but also controls pricing so they can't take advantage of the public by charging excessively. The utility commission usually sets prices aimed at achieving a reasonable return for the company's stockholders. On the other hand, young high-tech firms are classic examples of high-risk companies. That's because new technical ideas can be enormously profitable, complete failures, or anything in between. low-risk stocks because means the government gives You studied the history and prospects of both firms and their industries and with the help of your broker have made an estimate of the probability distribution of returns for each stock as follows Retun Probability of Return Occurring Return Probability of Return Occurring Northwest Water lnc. Bearcat Tech Corp. 0.15 0.20 0.30 0.20 0.15 0.05 0.15 10% 12% 0.15 0.05 20% 50% 150% (a) Calculate the expected return for each stock (b) Calculate the variance and standard deviation of the return on each stock. (c) Calculate the coefficient of variation for each stock's return. (d) Which stock would you choose? Explain why.

Explanation / Answer

North west Water Inc.                         Bearcat Tech Corp. Return Prob. Ret.*Prob. Deviation=Ret.-Exp.ret. Dev.^2 Var.= Dev^2*prob. Return Prob. Ret.*Prob. Deviation=Ret.-Exp.ret. Dev.^2 Var.= Dev^2*prob. 0.04 0.05 0.002 -0.04 0.0016 0.00008 -1.25 0.15 -0.1875 -1.4475 2.095256 0.314288 0.06 0.15 0.009 -0.02 0.0004 0.00006 0 0.2 0 -0.1975 0.039006 0.007801 0.08 0.6 0.048 0 0 0 0.2 0.3 0.06 0.0025 6.25E-06 1.88E-06 0.1 0.15 0.015 0.02 0.0004 0.00006 0.5 0.2 0.1 0.3025 0.091506 0.018301 0.12 0.05 0.006 0.04 0.0016 0.00008 1.5 0.15 0.225 1.3025 1.696506 0.254476 Total 1 0.08 0.00028 0.1975 0.594869 Expected return is the sum of Ret*Prob. 8% 19.75% Variance of the stock    = 0.028% 59.490% Std.deviation = Sq.rt. Of variance= 0.0167332 0.771277 ie. 1.67% ie. 77.13% Coefficient of variation= Std.deviation/Mean expected return ie. 0.0167/0.08 0.7713/0.1975 ie. 0.20875 3.905316 0.21 3.91 21% 391% d. Northwest water Inc. stock can be chosen as it has proportinally lesser std. deviation and hence less risky.

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