Reference no: EM132996287
Question - Anne is searching for shares to include in her current share portfolio. She is interested in Charter Ltd shares; she has been impressed with the company's computer products and believes it is an innovative market player. However, Anne realises that any time you consider a so-called Charter share, risk is a major concern. The rule she follows is to include only securities with a coefficient of variation of returns below 0.90.
Anne has obtained the following price information for the period from 2016 to 2019. Charter Ltd, being growth-oriented, did not pay any dividends during these four years.
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Charter Ltd Share Price
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Year
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Beginning
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End
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2016 - 2017
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$14.36
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$21.55
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2017 - 2018
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21.55
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34.78
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2018 - 2019
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34.78
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60.38
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2019 - 2020
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60.38
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81.80
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Required -
a. Calculate the rate of return each year, from 2016 to 2019, for Charter Ltd.
b. Assume that each year's return is equally probable and calculate the average return over this period.
c. Calculate the standard deviation of returns over the past four years and interpret the result.
d. Based on parts b and c, determine the coefficient of variation of returns for the security.
e. Given the calculation in part d, what should be Anne's decision regarding the inclusion of Charter Ltd in his portfolio.
f. Assume that Charter Ltd has a β of 2. If financial analysts expect the market return to decrease by 10% due to negative impact of COVID 19 in the 2020-2021 financial year, what would be Charter's expected return? Considering this new information what should be Anne's decision regarding the inclusion of Charter Ltd in his portfolio.