Problem 9-33 Risk, Return, and Their Relationship (LG9-3, LG9-4) Consider the fo

Question

Problem 9-33 Risk, Return, and Their Relationship (LG9-3, LG9-4) Consider the following annual returns of Estee Lauder and Lowe’s Companies: Estee Lauder Lowe’s Companies Year 1 24.4 % 4.0 % Year 2 29.0 17.1 Year 3 18.6 5.2 Year 4 50.9 49.0 Year 5 17.8 19.0 Compute each stock’s average return, standard deviation, and coefficient of variation. (Round your answers to 2 decimal places.) Estee Lauder Lowe’s Companies Average return % % Standard deviation % % Coefficient of variation Which stock appears better? Lowe’s Companies Estee Lauder

Explanation / Answer

Estee Lauder's Average return=(24.4-29+18.6+50.9-17.8)/5=9.42%

Lowe's Average Return=(-4+17.1+5.2+49-19)/5=9.66%

Estee Lauder's s.d.=sqrt(((24.4-9.42)^2+(-29-9.42)^2+(18.6-9.42)^2+(50.9-9.42)^2+(-17.8-9.42)^2)/5)=29.14%

Lowe's' s.d.=sqrt(((-4-9.66)^2+(17.1-9.66)^2+(5.2-9.66)^2+(49-9.66)^2+(-19-9.66)^2)/5)=22.938%

C.V.=Standard Deviation/Average

Estee Lauder's C.V.=29.14%/9.66%=3.016

Lowe's' C.V.=22.938/9.66=2.374

Lower the C.V., better is the stock

Hence Lowe's is better

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