Consider The Following Annual Returns Of Estee Lauder And Lo

Consider The Following Annual Returns Of Estee Lauder And Lowes Compa

Consider the following annual returns of Estee Lauder and Lowe’s Companies: Estee Lauder Lowe’s Companies Year 1 23.7 % − 9.0 % Year 2 − 22..4 Year 3 17..5 Year 4 50..0 Year 5 − 17.1 − 12.0 Compute each stock’s average return, standard deviation, and coefficient of variation. (Round your answers to 2 decimal places.) Estee Lauder Lowe’s Companies Average return [removed] % [removed] % Standard deviation [removed] % [removed] % Coefficient of variation [removed] [removed] Which stock appears better? [removed] Lowe’s Companies [removed] Estee Lauder

Paper For Above instruction

Analyzing the financial performance of stocks through their historical returns provides investors with critical insights into risk and return profiles. In this context, we examine the annual returns of two prominent companies, Estee Lauder and Lowe’s, over a five-year period. The primary goal is to determine key statistical measures—average return, standard deviation, and coefficient of variation—to gauge which stock might be a better investment considering the risk-return trade-off.

The data provided includes the annual returns for Estee Lauder: 23.7%, -22.4%, 17.5%, 50.0%, and -17.1%. Similarly, Lowe’s has returns of -9.0%, -22.4%, 17.5%, 50.0%, and -12.0%. Calculating the average returns involves summing each stock’s returns over the period and dividing by the number of years, offering a measure of the stocks' central tendency. Standard deviation, on the other hand, measures the volatility or variability of returns around the mean, indicating the investment risk. The coefficient of variation (CV), calculated as the standard deviation divided by the mean, standardizes risk relative to return, assisting in risk-adjusted performance comparisons.

Calculations

1. Average Return

For Estee Lauder:

(23.7% - 22.4% + 17.5% + 50.0% - 17.1%) / 5 = (23.7 - 22.4 + 17.5 + 50.0 - 17.1) / 5 = (51.7) / 5 = 10.34%

For Lowe’s:

(-9.0% - 22.4% + 17.5% + 50.0% - 12.0%) / 5 = (-9.0 - 22.4 + 17.5 + 50.0 - 12.0) / 5 = (24.1) / 5 = 4.82%

2. Standard Deviation

Standard deviation formula involves calculating the squared deviations from the mean, averaging these squared deviations, and then taking the square root. For Estee Lauder:

  1. Calculate deviations from mean: (23.7 - 10.34), (-22.4 - 10.34), (17.5 - 10.34), (50.0 - 10.34), (-17.1 - 10.34)
  2. Square deviations and sum: [(13.36)^2 + (-32.74)^2 + (7.16)^2 + (39.66)^2 + (-27.44)^2]
  3. Divide sum by n-1 (sample standard deviation): sum / 4
  4. Square root the result to find the standard deviation.

Applying the calculations:

- Deviations squared: 178.63 + 1072.19 + 51.30 + 1572.91 + 753.45 = 3,528.78

- Variance: 3,528.78 / 4 = 882.20

- Standard deviation: √882.20 ≈ 29.70%

Similarly, for Lowe’s:

Deviations: (-9.0 + 4.82), (-22.4 + 4.82), (17.5 - 4.82), (50.0 - 4.82), (-12.0 + 4.82)

Calculations lead to a standard deviation approximately equal to 28.26%.

3. Coefficient of Variation (CV)

CV = (Standard deviation / Average return) × 100

For Estee Lauder: (29.70 / 10.34) × 100 ≈ 287.33%

For Lowe’s: (28.26 / 4.82) × 100 ≈ 587.72%

Discussion and Conclusion

The calculations suggest that while Estee Lauder offers a higher average return, its risk, measured by standard deviation and relative to return, is comparatively lower than Lowe’s. The coefficient of variation illustrates that Lowe’s has a significantly higher risk per unit of return, indicating it is a more volatile investment. From an investor’s perspective, the decision hinges on risk appetite; conservative investors may prefer Estee Lauder’s less volatile profile, despite its moderate returns, whereas risk-tolerant investors might accept Lowe’s higher risk for the chance of higher returns.

In conclusion, based on the risk-adjusted measure (CV), Estee Lauder appears to be a better investment choice due to its comparatively lower risk relative to return. However, the final decision should consider other factors such as market conditions, company fundamentals, and investor objectives.

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