pretend that you are a financial advisor

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Background

The Stocks A and B data file provides the annual rates of return for two stocks over a period of fifty years, where the rate of return for a stock or a portfolio in year t represents the change in the value of the stock or portfolio over year t divided by its value at the beginning of year t. A return of 0.2 is equivalent to a 20% return.

The expected return of a stock or a portfolio of stocks is simply the average annual return over the period.

In an investment context, the standard deviation of the return measures the riskiness of the stock or portfolio and the coefficient of variation measures its risk per unit of return.

For the purposes of this assignment, use the performance of stocks A and B over the past 50 years as a guide for investment recommendations. In other words, do not give greater weight to recent years.

Source: Bryant, P. G., and Smith, M. A. (1998), Practical Data Analysis: Case Studies for Business Statistics (2nd ed.), New York: McGraw Hill).

Assignment

Pretend that you are a financial advisor. One of your clients has asked your advice. In particular, would you recommend investing entirely in stock A, entirely in stock B, or half in stock A and half in stock B. She has limited background in statistics, economics, and finance, but she would like to maximize her returns and to minimize risk. She is only open to the three investment options mentioned above.

Write her a letter recommending one of the three investment opportunities described above or indicating that all three opportunities are equally worthwhile. Provide statistics to support your recommendation or to show why all three opportunities are equally worthwhile. If you made a specific recommendation, convince your client that this investment opportunity is better than the alternatives; otherwise convince her that all three opportunities are equally worthwhile. Finally, discuss one caveat or limitation of your analysis.

The Excel guidelines on Canvas provide all of the necessary tools for your statistical analysis.

Your letter should easily fit on one page. If you have thoroughly addressed the questions above, do not worry if the letter is very brief.

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