Short Paper
Case: The Risk - Return Tradeoff: Molly O'Rourke Stock Purchase Decision
Over the past 10 years, Molly O'Rourke has slowly built a diversified portfolio of common stock. Currently her portfolio includes 20 different common stocks and has a total market value of 82,500.
Molly is at present considering the addition of 50 shares of other of 2 common stock issue - X or Y. To assess return and risk of each of these issues she had gathered dividend income and share price data for both over the last 10 years (2004 - 2013). Molly's investigation of the outlook these issues that each will, on average, tend to behave in the future just as it has in the past. She therefore believes that the expected return can be estimated by finding the average HPE over the past 10 years for each of the stocks. The historical dividend income and stock price data collected by Molly are given in the accompanying table.
|
Stock X
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Stock Y
|
|
|
Share Price
|
|
Share Price
|
|
Year
|
Dividend Income
|
Beginning
|
Ending
|
Dividend Income
|
Beginning
|
Ending
|
|
2004
|
$ 1.00
|
$ 20.00
|
$ 22.00
|
$ 1.50
|
$ 20.00
|
$ 20.00
|
|
2005
|
1.50
|
22.00
|
21.00
|
1.60
|
20.00
|
20.00
|
|
2006
|
1.40
|
21.00
|
24.00
|
1.70
|
20.00
|
21.00
|
|
2007
|
1.70
|
24.00
|
22.00
|
1.80
|
21.00
|
21.00
|
|
2008
|
1.90
|
22.00
|
23.00
|
1.90
|
21.00
|
22.00
|
|
2009
|
1.60
|
23.00
|
26.00
|
2.00
|
22.00
|
23.00
|
|
2010
|
1.70
|
26.00
|
25.00
|
2.10
|
23.00
|
23.00
|
|
2011
|
2.00
|
25.00
|
24.00
|
2.20
|
23.00
|
24.00
|
|
2012
|
2.10
|
24.00
|
27.00
|
2.30
|
24.00
|
25.00
|
|
2013
|
2.20
|
27.00
|
30.00
|
2.40
|
25.00
|
25.00
|
Questions
1. Determine the HPR for each stock in each of the preceding 10 years. Fins the expected return for each stock, using the approach specified by Molly.
2. Use the HPRs and expected return calculated in question 1 to find the standard deviation of the HPRs for each stock over the 10 - year period.
3. Use the findings to evaluate and discuss the return and risk associated with stocks X and Y. Which stock seems preferable? Explain.
4. Ignoring her existing portfolio, what recommendations would you give to Molly with regard to stocks X and Y?