Consider comparing an established technology company’s stock with an average price of $26.05 and a standard...

Consider comparing an established technology company’s stock with an average price of $26.05 and a standard deviation of $7.00 against a penny stock with an average price of $0.77 and a standard deviation of $1.00. Which stock is more volatile? Which metric shall be used to compare these two stocks (Variance, Standard Deviation, Mean, Coefficient of Variation, etc.)? Why?

Expert Solution

Solution:

In this case we use coefficient of variation.

Why:

Comparison purposes Mean is not use because mean affected from outliers value. Variance or standard deviation is not use because if two group have same variance or standard deviation and also different mean then that case we don't compare two group as well as which is best. So this whole situation we use coefficient of variance is best idea.Also CV is free from unit.

The coefficient of variation (CV) is the ratio of the standard deviation to the mean.

i.e 1) CV for technology company stock is

=26.87%

2) CV for penny stock is

=129.87%

CV of technology<CV of penny stock

Therefore,

The higher the coefficient of variation, the greater the level of dispersion around the mean and the lower the value of the coefficient of variation, the more precise the estimate.

Hence, we concluded that penny stock is more Volatile.

orchestra answered 1 year ago

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