finance case

-Return Tradooff: Molly O’Rourke’s Stock Purchase Decision
m3 m Over the past 10 years Molly O’Rourke has slowl
y built a diversified portfolio of common
stock. Currently her portfolio includes 20 different common stock issues and has a coral market
value of $82,500. g
Molly is at present considering the addition of 50 shares of either of 2 common stoct
men-X or Y. To assess the return and risk of each of these issues, she has gathered di’i
dend income and share price data for both over the last 10 years (2004-2013). Molly?
inVflUSfltIOfl of the .0“le for these issues suggests that each will, on average, tend to
b‘h‘” m fl” film“ 11m as it has in the past. She therefore believes that the expected realm
can be ““9““! by finding the average HPR over the past 10 years for each of the snacks
The historical dmdend income and stock price data collected by Molly are given in the
accompanying table.
Stodt X Stoth
Share Price Share Price
Dividend Dividend
Year Income Beginning ’ Encfing 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 28.00 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 l
a. Determine the HPR for each stock in each of the preceding 10 years. Find the expected return
7 for each stock, using the approach specified by Molly.
h. Uee the HPR: and expected return calculated in question a to find the standard deviation of
the HPRs for each stock over the 10-year period.
c. Use your findings to evaluate and discuss the return and risk associated with stocks X and Y.
Which crock seems preferable? Explain.
d. Ignoring her existing portfolio, what recommendations would you give Molly with regard to
stocks X and