What is corporate social responsibility? How does that play into risk and funding?

What is corporate social responsibility? How does that play into risk and funding?

Essential Activities:

Reading Chapter 9 and 10 in the text will assist you in writing this discussion forum.

Watching the videos The man who figured out Madoff’s Ponzi Scheme and Internal Control Basics will assist you in writing this discussion forum.

Notes:

Please refer to the discussion forum rubric on the start here tab for this assignment.

Initial discussion forum is due by Wednesday and responses to two of your classmates are due by Saturday.

Each week to earn full points on the discussion forums, make sure to include outside sources to support your discussion.

Ensure that you are citing and referencing your work in APA format.

You should respond to at least two fellow students on two separate days.

Requirements: in-depth example

296cor91411_ch09_296-329.indd 296 01/20/17 04:22 PMIs there such a thing as a high-reward, zero-risk investment?Characterizing Risk and Return9PART FIVEviewpointsBusiness ApplicationManagers from the production and marketing departments have proposed some risky new business projects for your firm. These new ideas appear to be riskier than the firmÕs current business operations.You know that diversifying the firmÕs product offerings could reduce the firmÕs overall risk. However, you are concerned that taking on these new projects will make the firmÕs stock too risky. How can you determine whether these project ideas would make the firmÕs stock riskier or less risky? (See the solution at the end of the chapter.)Personal ApplicationSuppose an investor owns a portfolio invested 100 percent in long-term Treasury bonds because the owner prefers low risk. The investor has avoided owning stocks because of their high volatility.The investorÕs stockbroker claims that putting 10 percent of the portfolio in stocks would actually reduce total risk and increase the portfolioÕs expected return. The investor knows that stocks are riskier than bonds. How can adding the risky stocks to the bond portfolio reduce the risk level? (See the solution at the end of the chapter.)Final PDF to printer

297cor91411_ch09_296-329.indd 297 01/20/17 04:22 PMYou can invest your money very safely by opening a savings account at a bank or by buying Treasury bills. So why would you invest your money in risky stocks and bonds if you can take advantage of low-risk oppor-tunities? The answer: Very low risk investments also provide a very low return. Investors take on higher risk investments in expectation of earning higher returns. Likewise, businesses also take on risky capital invest-ments only if they expect to earn higher returns that at least cover their costs, including investorsÕ required return. Both investor and business sentiments create a positive rela-tionship between risk and expected return. Of course, taking risk means that you get no guarantee that you will recoup your investment. In the short run, higher risk investments often significantly underperform lower risk investments. In addition, not all forms of risk are rewarded. In © Brand X Pictures/Superstock LG9-1 Compute an investmentÕs dollar and percentage return. LG9-2 Find information about the historical returns and volatil-ity for the stock, bond, and cash markets. LG9-3 Measure and evaluate the total risk of an investment using several methods. LG9-4 Recognize the risk-return relationship and its implications. LG9-5 Plan investments that take advantage of diversification and its impact on total risk. LG9-6 Find efficient and optimal portfolios. LG9-7 Compute a portfolioÕs return.Learning Goalsthis chapter, youÕll see how the risk-return relationship fundamentally affects finance theory. We focus on using historical information to char-acterize past returns and risks. We show how you can diversify to elimi-nate some risk and expect the highest return possible for your desired risk level. In Chapter 10, weÕll turn to estimating the risks and returns you should expect in the future.Final PDF to printer

298 part five Risk and Returncor91411_ch09_296-329.indd 298 01/20/17 04:22 PM 9.1 ∙ Historical ReturnsLetÕs begin our discussion of risk and return by characterizing the concept of return. First, we need a method for calculating returns. After computing a return, investors need to assess whether it was a good, average, or bad investment return. Examining returns from the past gives us a general idea of what we might expect to see in the future. We should think in terms of return for the long run because a return for any one year can be quite different from the average returns from the past couple of decades.Computing ReturnsHow much have you earned on each of your investments? Two ways to determine this are to compute the actual dollar return or compute the dollar return as a percentage of the money invested.DOLLAR RETURN The dollar return earned includes any capital gain (or loss) that occurred as well as any income that you received over the period. Equation 9-1 illustrates the dollar return calculation: Dollar return = Capital gain or loss + Income= (Ending value Ð Beginning value) + Income (9-1)For example, say you held 50 shares of Alphabet (GOOG), the parent company of Google. The stock price had a market price of $526.40 per share at the end of 2014. Alphabet paid no dividends during 2015. At the end of 2015, AlphabetÕs stock price was $758.88. For the whole of 2015, you earned a capital gain of ($758.88 Ð $526.40) × 50 shares, or $11,624.In AlphabetÕs case, the stock price increased, so you experienced a capital gain. On the other hand, the toy and game producer Mattel, Inc. (MAT) started the year at $30.95 per share, paid $1.52 in dividends, and ended 2015 at $27.17. If you owned 200 shares of Mattel, you would have experienced a capital loss of Ð$756 (= [$27.17 Ð $30.95] × 200 shares). This loss would have been partially offset by the $304 of dividends received. However, the total dollar return would still have been Ð$452 (= Ð$756 + $304). Stock prices can fluctuate substantially and cause large positive or negative dollar returns.Does your dollar return depend on whether you continue to hold the Alphabet and Mattel stock or sell it? No. In general, finance deals with market values. Alphabet stock was worth $758.88 at the end of 2015 regardless of whether you held the stock or sold it. If you sell it, then we refer to your gains as ÒrealizedÓ gains. If you continue to hold the stock, the gains are ÒunrealizedÓ gains.PERCENTAGE RETURN We usually find it more useful to characterize investment earnings as percentage returns so that we can easily compare one investmentÕs return to other alternativesÕ returns. We calculate percentage return by dividing the dollar return by the investmentÕs value at the beginning of the time period. Percentage return = Ending value Ð Beginning value + Income ___________________________________ Beginning value × 100% (9-2)Because itÕs standardized, we can use percentage returns for almost any type of invest-ment. We can use beginning and ending values for stock positions, bond prices, real estate values, and so on. Investment income may be stock dividends, bond interest pay-ments, or other receipts. The percentage return for holding the Mattel stock during calen-dar year 2015 was Ð7.3 percent, computed as Mattel percentage return = ($27.17 × 200) − ($30.95 × 200) + ($1.52 × 200) _________________________________________ $30.95 × 200 = −0.073, or −7.3% LG9-1dollar returnThe amount of profit or loss from an investment denoted in dollars.percentage returnThe dollar return character-ized as a percentage of money invested.Final PDF to printer

chapter 9 Characterizing Risk and Return 299cor91411_ch09_296-329.indd 299 01/20/17 04:22 PMThe return for the Alphabet position during the same period was a whopping 44.16 percent: Alphabet percentage return = ( $758.88 × 50 ) − ( $526.40 × 50 ) _______________________________ $526.40 × 50 = 0.4416, or 44.16% Both firms belong to the S&P 500 Index, which earned 1.38 percent in 2015.EXAMPLE 9-1Computing ReturnsYou are evaluating a stockÕs short-term performance. On August 16, 2010, technology firm 3PAR saw its stock price surge on news of a takeover battle between Dell and Hewlett-Packard. 3PAR stock had closed the previous trading day at $9.65 and was up to $18.00 by the end of the day. 3PAR had ended 2009 at $11.85 and does not pay a dividend. What is the dollar return and percentage return of 300 shares of 3PAR for the day and year to date?SOLUTION: For the day, realize that no income is paid. Therefore, the dollar return is $2,505 = 300 × ($18.00 Ð $9.65) + 0 and the percent return is 86.53% = $2,505 Ö (300 × $9.65). The year to date (YTD) return also does not include dividend income. So the dollar YTD return is $1,845 = 300 × ($18.00 Ð $11.85). The 3PAR YTD percentage return is 3PAR YTD return = ( $18.00 × 300 ) − ( $11.85 × 300 ) + ( $0 ) ________________________________ $11.85 × 300 = 0.5190, or 51.90% Hewlett-Packard eventually won the bidding war and purchased 3PAR for $33 per share!Similar to Problems 9-1, 9-2, 9-3, 9-4, Self-Test Problem 1LG9-1 Are one-year returns typical for expectations in the long run? We look to average returns to examine performance over time. The arithmetic average return provides an estimate for how the investment has performed over longer periods of time. The formula for the average return is Average return = Sum of all returns Ö Number of returns = Σ t=1 N Return t __________ N (9-3)where the return for each subperiod is summed up and divided by the number of subperi-ods. You can state the returns in either percentage or decimal format. Alphabet has only been a public company for a relatively brief period, so it will not have a long history of returns. Thus, Table 9.1 shows the annual returns for Mattel and office supply store Staples, Inc., from 1991 to 2015. First, notice that over time, the returns are quite varied for both firms. The stock return for Mattel has ranged from a low of Ð52.4 percent in 1999 to a high of 82.6 percent in 1991. StaplesÕ stock return varied between Ð45.7 percent (2015) to 171.6 percent (1991). Also note that the returns appear unpredictable or random. Sometimes a large negative return is followed by another bad year, like MattelÕs returns in 2007 and 2008. Other times, a poor year is fol-lowed by a very good year, like 2008 and 2009 for Staples. The table also reports aver-age annual returns for Mattel and Staples of 14.8 percent and 19.4 percent, respectively. Over the years, the annual returns for these stocks have been quite different from their average returns.average returnsA measure summarizing the past performance of an investment.For interactive versions of this example, log in to Connect or go to mhhe.com/Cornett4e.Final PDF to printer

300 part five Risk and Returncor91411_ch09_296-329.indd 300 01/20/17 04:22 PMABCDEF1MattelStaplesMattelStaples2199182.6%171.6%20045.4%24.0%3199233.0%14.9%2005−12.6%9.5%419936.9%13.5%200652.1%9.4%5199415.5%30.0%2007−10.5%−5.9%6199559.8%46.3%2008−28.5%−32.5%7199610.5%24.9%200944.3%49.5%8199746.6%32.9%201024.0%−3.3%91998−43.0%136.4%201135.6%−32.7%101999−52.4%−16.8%201225.9%−4.6%11200047.4%−30.5%201334.3%0.8%12200128.8%10.0%2014−32.1%34.5%1320025.5%−5.8%2015−5.2%−45.7%142003−3.5%55.0%15Average =14.8%19.4% Note the range of returns. Few annual returns are close to the average return.Data Source: Yahoo! FinanceTABLE 9.1 Annual and Average Returns for Mattel and Staples, 1991 to 2015The average returns shown in this chapter are more precisely called arithmetic aver-age returns. These average returns are appropriate for statistical analysis. However, they do not accurately illustrate the historical performance of a stock or portfolio. To see this, consider the $100 stock that earned a 50 percent return one year (to $150) and then earned a Ð50 percent return the next year (to $75). The arithmetic average return is therefore (50% + Ð50%) Ö 2 = 0%. Do you believe the average return was zero percent per year? If you started with a $100 stock and ended with a $75 stock, did you earn zero per-cent? No, you lost money. A measure of that performance should illustrate a negative return. The accurate measure to be used in performance analysis is called the geometric mean return, or the mean return computed by finding the equivalent return that is com-pounded for N periods. In this example, the mean return is [(1 + 0.50) × (1 + Ð0.50)]1/2 Ð 1 = Ð0.134, or Ð13.4 percent. Given the loss of $25 over two years, this Ð13.4 percent per year mean return seems more reasonable than the zero percent average return.The general formula for the geometric mean return is Geometric mean return = [ Π t=1 N (1 + Return t _______ 100 ) ] 1 __ N −1 (9-4)Performance of Asset ClassesDuring any given year, the stock market may perform better than the bond market, or it may perform worse. Over longer time periods, how do stocks, bonds, or cash securities perform? Historically, stocks have performed better than either bonds or cash. Table 9.2 shows the average returns for these three asset classes over the period 1950 to 2015, as well as over various subperiods. Over the entire period, stocks (as measured by the S&P 500 Index) earned an average 12.6 percent return per year. This is nearly double the 6.6 percent return earned by long-term Treasury bonds. Cash securities, measured by U.S. Treasury bills, earned an average 4.4 percent return.The table also shows each asset classÕs average return for each decade since 1950. The best decade for the stock market was the 1950s, when stocks earned an aver-age 20.9 percent per year. The 1990s ran a close second with a 19 percent per year geometric mean returnThe mean return computed by finding the equivalent return that is compounded for N periods.LG9-2Final PDF to printer

chapter 9 Characterizing Risk and Return 301cor91411_ch09_296-329.indd 301 01/20/17 04:22 PMABCDE1StocksLong-Term Treasury BondsT-Bills21950 to 2015Average12.6%6.6%4.4%31950 to 1959Average20.9%0.0%2.0%41960 to 1969Average8.7%1.6%4.0%51970 to 1979Average7.5%5.7%6.3%61980 to 1989Average18.2%13.5%8.9%71990 to 1999Average19.0%9.5%4.9%82000 to 2009Average0.9%8.0%2.7%92010Annual Return15.1%9.4%0.01%102011Annual Return2.1%29.9%0.02%112012Annual Return16.0%3.6%0.02%122013Annual Return32.4%−12.7%0.07%132014Annual Return13.7%25.1%0.05%142015Annual Return1.4%−1.2%0.21%152010 to 2015Average13.4%9.0%0.06%Returns have been very different among decades.TABLE 9.2 Annual and Average Returns for Stocks, Bonds, and T-Bills, 1950 to 2015TIME OUT 9-1 How important were dividend payments to the total returns that Mattel and Staples offered investors?   9-2 Using the average returns shown in Table 9.2, compute how much a $10,000 invest-ment made in each asset class at the beginning of each decade would become at the end of each decade.  return. The best decade for the bond market was the 1980s, when it earned an average 13.5  percent per year return due to capital gains as interest rates fell. Stocks have out-performed bonds in every decade since 1950 except the recent 2000s. Notice that the average return in the stock and bond markets has not been negative during any decade since 1950. But average stock returns do not really paint a very accurate picture of annual returns. Individual annual returns can vary strongly and be quite negative in any particular year. Indeed, this annual variability defines risk. The stock market return in 2008 was particularly poor because of the financial crisis. However, not all stocks fell the same amount. Notice that Mattel and Staples declined by only 28.5 and 32.5 percent while the stock market in general declined 35.5 percent. Financial company stocks fell the most during the crisis.9.2 ∙ Historical RisksWhen you purchase a U.S. Treasury bill, you know exactly what your dollar and per-centage return are going to be. Many people find comfort in the certainty from this safe investment. On the other hand, when you purchase a stock, you do not know what your return is going to beÑeither in the short term or in the long run. This uncertainty is pre-cisely what makes stock investing risky. ItÕs useful to evaluate this uncertainty quantita-tively so that we can compare risk among different stocks and asset classes.LG9-3Final PDF to printer

302 part five Risk and Returncor91411_ch09_296-329.indd 302 01/20/17 04:22 PMComputing VolatilityFinancial theory suggests that investors should look at an investmentÕs historical returns to assess how much uncertainty to expect in the future. If you see high vari-ability in historical returns, you should expect a high degree of future uncertainty. Table 9.2 shows that between 2010 and 2015, the stock market experienced a range of 1.4 percent return in 2015 to a 32.4 percent return in 2013. Bonds also experienced variability: Ð12.7 percent return in 2013 to 29.9 percent return in 2011. Examining the range of historical returns provides just one way to express the return volatility that we can expect. In practical terms, the finance industry uses a statistical return volatility measure known as the standard deviation of percentage returns. We cal-culate standard deviation as the square root of the variance, and this figure represents the securityÕs or portfolioÕs total risk. WeÕll discuss other risk measurements in the next chapter.Our process of computing standard deviation starts with the average return over the period. The average annual return for the stock market since 1950 is 12.6 percent. How much can the return in any given year deviate from this average? We compute the actual annual deviation by subtracting the return each year from this average return: Return(1950) Ð Average return; Return(1951) Ð Average return; Return(1952) Ð Average return, and so on. Note that many of these deviations will be negative (from a lower-than-average return that year) and others will be positive (from a higher-than-average return). If we computed the average of these return deviations, our result would be zero. Large positive deviations cancel out large negative deviations and hide the variability. To really see the size of the variations without the distractions that come with including a positive or negative sign, we square each deviation before adding them up. Dividing by the number of returns in the sample minus one provides the return variance.1 The square root of the return vari-ance is the standard deviation: Standard deviation = Square root of the average squared deviation of returns = √ _________________________ Σ t=1 N ( Return t − Average return ) 2 _________________________ N − 1 (9-5)Note that this equation provides an estimate of the true population standard devia-tion using a specific historical sample. A large standard deviation indicates greater return volatilityÑor high risk. Table 9.3 shows the standard deviations of Mattel stock returns over 25 years. The Deviation column shows the annual return minus MattelÕs average return of 14.8 percent. The last column squares each deviation. Then we sum up these squared deviations and divide the result by the number of observations less one (24) to compute the return variance. If we want to use a measure that makes sense in the real world (how would you interpret a squared percentage, anyway?), we take the square root of the variance to get the standard deviation. MattelÕs standard devia-tion of returns during this sample period comes to 33.4 percent. In comparison, the standard deviation of Staples stock returns for this same period is 48.7 percent. Since StaplesÕ standard deviation is higher, its stock features more total risk than MattelÕs stock does.Although analysts and investors use a stock returnÕs standard deviation as an impor-tant and common measure of risk, itÕs laborious to compute by hand. Most people use a spreadsheet or statistical software to calculate stock return standard deviations.standard deviationA measure of past return volatility, or risk, of an investment.total riskThe volatility of an invest-ment, which includes cur-rent portions of firm-specific risk and market risk.1We use the denominator of N − 1 to compute a sampleÕs standard deviation, which is the most common for finance applications. We would divide the standard deviation of a population simply by N. Final PDF to printer

chapter 9 Characterizing Risk and Return 303cor91411_ch09_296-329.indd 303 01/20/17 04:22 PMTABLE 9.3 Computation of Mattel Stock Return Standard DeviationABCD1Mattel ReturnDeviationSquared Deviation2199182.6%67.8%46.0%3199233.0%18.1%3.3%419936.9%−7.9%0.6%5199415.5%0.6%0.0%6199559.8%45.0%20.3%7199610.5%−4.3%0.2%8199746.6%31.7%10.1%91998−43.0%−57.8%33.4%101999−52.4%−67.2%45.1%11200047.4%32.6%10.6%12200128.8%14.0%2.0%1320025.5%−9.3%0.9%142003−3.5%−18.3%3.3%1520045.4%−9.5%0.9%162005−12.6%−27.4%7.5%17200652.1%37.2%13.9%182007−10.5%−25.4%6.4%192008−28.5%−43.3%18.8%20200944.3%29.5%8.7%21201024.0%9.2%0.8%22201135.6%20.8%4.3%23201225.9%11.1%1.2%24201334.3%19.5%3.8%252014−32.1%−46.9%22.0%262015−5.2%−20.1%4.0%27Average =   14.8%Sum =268.2% 28Variance =  11.2% 29Std Dev = 33.4%30=AVERAGE(B2:B26)31=D27/(COUNT(D2:D26)-1)=D28^0.5Investors use standard deviation as a measure of risk; the higher the standard deviation, the riskier the asset.Data Source: Yahoo! FinanceRisk and ReturnFind the average return and risk (as measured by standard deviation) for Mattel since 2006. Table 9.3 shows the annual returns for years 2006 to 2015.SOLUTION: First, compute the average annual return for the period. Using equation 9-3: 52.1% − 10.5% − 28.5% + 44.3% + 24.0% + 35.6% + 25.9% + 34.3% − 32.1% − 5.2% _______________________________________________________________________________ 10 = 140.0% ________ 10 = 14.0% EXAMPLE 9-2LG9-1, LG9-3For interactive versions of this example, log in to Connect or go to mhhe.com/Cornett4e.Final PDF to printer

304 part five Risk and Returncor91411_ch09_296-329.indd 304 01/20/17 04:22 PMStocksLong-Term Treasury BondsT-Bills1950 to 201517.3%11.1%3.0%1950 to 195919.8%4.9%0.8%1960 to 196914.4%6.2%1.3%1970 to 197919.2%6.8%1.8%1980 to 198912.7%15.1%2.6%1990 to 199914.2%12.8%1.2%2000 to 200920.4%10.3%1.9%2010 to 201511.3%16.1%0.1%Some decades experience higher risk than others in each asset class.TABLE 9.4 Annual Standard Deviation of Returns for Stocks, Bonds, and T-Bills, 1950 to 2015Mattel has averaged a 14.0 percent return per year since 2006. To compute the risk, use the standard deviation equation 9-5. First, find the deviations of return for each year:Year 200620072008200920102011201220132014201552.1%Ð14.0%Ð10.5%Ð14.0%Ð28.5%Ð14.0%44.3%Ð14.0%24.0%Ð14.0%35.6%Ð14.0%25.9%Ð14.0%34.3%Ð14.0%Ð32.1%Ð14.0%Ð5.2%Ð14.0%Square those deviations:Year 2006200720082009201020112012201320142015(52.1%Ð14.0%)2(Ð10.5%Ð14.0%)2(Ð28.5%Ð14.0%)2(44.3%Ð14.0%)2(24.0%Ð14.0%)2(35.6%Ð14.0%)2(25.9%Ð14.0%)2(34.3%Ð14.0%)2(Ð32.1%Ð14.0%)2(Ð5.2%Ð14.0%)2Then add them up, divide by n − 1, and take the square root: = √ ___________________________________________________________________________ 1449.3 + 602.2 + 1805.4 + 920.5 + 100.4 + 467.4 + 142.3 + 412.5 + 2122.4 + 370.2 ___________________________________________________________________________ 9 = √ ______ 932.5 = 30.5% Mattel stock has averaged a 14.0 percent return with a standard deviation of 30.5  percent since 2006.Similar to Problems 9-15, 9-16, 9-17, 9-18, 9-33, 9-34, Self-Test Problem 2Risk of Asset ClassesWe report the standard deviations of return for stocks, bonds, and T-bills in Table 9.4 for 1950 to 2015 and for each decade since 1950. Over the entire sample, the stock market returnsÕ standard deviation is 17.3 percent. As we would expect, stock market volatility is higher than bond market volatility (11.1 percent) or for T-bills (3.0 percent). These vola-tility estimates are consistent with our previously stated position that the stock market carries more risk than the bond or cash markets do. Every decade since 1950 has seen a lot of stock market volatility. The bond market has experienced the most volatility since the 1980s as interest rates varied dramatically.You will recall from Chapter 7 that since any bondÕs par value and coupon rate are fixed, bond prices must fluctuate to adjust for changes in interest rates. Bond prices respond inversely to interest rate changes: As interest rates rise, bond prices fall, and if interest rates fall, bond prices rise. T-bill returns have experienced very low volatility over each decade. Indeed, T-bills are commonly considered to be one of the only risk-free assets. Higher-risk investments offer higher returns over time. But short-term fluc-tuations in the value of higher risk investments can be substantial. The stock market is LG9-2Final PDF to printer

chapter 9 Characterizing Risk and Return 305cor91411_ch09_296-329.indd 305 01/20/17 04:22 PMriskyÑwhile it has offered a good annual return of 12.6 percent, that return comes with volatility of 17.3 percent standard deviation. Many investors may intellectually under-stand that this high risk means that they may receive very poor returns in the short term. Investors really felt the full force of this risk when the stock market declined three years in a row (2000 to 2002). Some investors even decided that this was too much risk for them and they sold out of the stock market before the 2003 rally. Other investors got out of the stock market after it plunged to lows in March 2009. Market volatility can cause investors to make emotionally based decisionsÑselling at low prices.The stock market returnsÕ standard deviations that appear in Table 9.4 are all consider-ably lower than the standard deviations of Mattel and of Staples stocks (33.4 percent and 48.7 percent, respectively). In this case, we measure stock market return and standard deviation using the S&P 500 Index. Mattel and Staples are both included in the S&P 500 Index. Why do these two large firms have measures of total riskÑstandard deviationsÑthat are at least twice as large as the standard deviations on the stock market returns? Are Mattel and Staples just two of the most risky firms in the Index? Actually, no. The differ-ences in standard deviations between these individual companies and the entire market have much more to do with diversification. Owning 500 companies, such as all of those included in the S&P 500 Index, generates much less risk than owning just one company. This phenomenon appears in the standard deviation measure. WeÕll discuss the effects of diversification in detail later in this chapter.Risk versus ReturnInvestors can buy very safe T-bills. Or they can take some risk to seek higher returns. How much extra return can you expect for taking more risk? This is known as the trade-off between risk and return. The coefficient of variation (CoV) is a common relative measure of this risk-vs-reward relationship. The equation for the coefficient of variation is simply the standard deviation divided by average return. It is interpreted as the amount of risk (measured by volatility) per unit of return: Coefficient of variation = Amount of risk Ö Return = Standard deviation ________________ Average return (9-6)As an investor, you would want to receive a very high return (the denominator in the equation) with a very low risk (the numerator). So, a smaller CoV indicates a better risk-reward relationship. Since the average return and standard deviation for Mattel stock are 14.8 percent and 33.4 percent, its CoV is 2.26 (= 33.4 Ö 14.8). This is better than StaplesÕ CoV of 2.51 (= 48.7 Ö 19.4). For all asset classes for the period 1950 to 2015, the stock market earned a higher return than bonds and was also riskier. But which one had a better risk-return relationship? The CoV for common stock is 1.37 (= 17.3 Ö 12.6). For Treasury bonds, the coefficient of variation is 1.68 (= 11.1 Ö 6.6). Even though stocks are riskier than bonds, they involve a somewhat better risk-reward trade-off.LG9-4coefficient of variationA measure of risk to reward (standard deviation divided by average return) earned by an investment over a specific period of time.EXAMPLE 9-3Risk versus ReturnYou are interested in the risk-return relationship of stocks in each decade since 1950. Obtain the average returns and risks in Table 9.2 and Table 9.4.LG9-4 For interactive versions of this example, log in to Connect or go to mhhe.com/Cornett4e.Final PDF to printer

306 part five Risk and Returncor91411_ch09_296-329.indd 306 01/20/17 04:22 PM9.3 ∙ Forming PortfoliosAs we noted previously, Mattel and Staples stocksÕ risk as measured by their standard deviations appear quite high compared to the standa

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