Take it to the Bank

Daryl Bank is an investment broker with Bank, Tank, & Shanka full service financial services firm serving the regional area ofsouthern West Virginia. From the corporate offices in Beckley,Daryl manages a large number of clients throughout the southernpart of the state.

Daryl is very customer service oriented and makes a personaleffort to visit every client at least twice a year, even if itmeans traveling to his or her hometown. He usually travels todifferent county seats throughout the state and stays a couple ofdays in a local hotel so clients can visit him in these variouslocations. With his laptop Daryl can access account information andthe latest information about traded securities using any number ofsoftware programs. His clients also enjoy seeing the demonstrationsof portfolio programs for their specific accounts.

Daryl also uses these trips to visit West Virginia companies forpotential investment possibilities. He likes to know the companieshe invests in, and wants to get a competitive advantage in anyinvestment decision. Since not many investment brokers are takingthe time to visit some of the smaller publicly traded West Virginiacompanies, Daryl feels that he knows substantially more about thesecompanies and their potential for excess returns than the generalmarket. He is always looking for undervalued opportunities forinvestment purposes so that his customers can also enjoy many happyreturns on their portfolios.

On a recent trip to Curveintheroad in the far southwestern partof the state, Daryl had the opportunity to visit three companies.He has been able to maintain a friendship with the top managementof these companies and was given access to important financialdata, which he planned to use to determine stock valuation.

The first company is Dig Deep, a regional coal mining company.They have been in operation for over 20 years and have the miningrights to over 100 square miles of land. Most of the coal they mineis the more clean burning anthracite coal. Even though they are arelatively small, company, they possess modern equipment and a veryefficient mining operation.

The stock price for Dig Deep was $32 on January 1, 20x0, $36 onDecember 31, 20x0, $33 for 12/31/x1, $35 for 12/31/x2, $42 for12/31/x3 and $44 for 12/31/x4. In the year 20x0 they paid adividend of $1.00, the same for 20x1, $1.10 in 20x2, $1.25 in 20x3and that amount again in 20x4. The standard deviation for theirstock is 6%, beta is 0.80, and correlation coefficient is .60.

The second company is Moon Shine, a regional medicinal spiritscompany. This company got its start about 75 years ago and has beenvery successful establishing a niche market in all natural herbalremedies. What makes this company especially appealing to Daryl isits ability to do well during times when the general economy is ina depression or recession.

The stock price for Moon Shine was $14 on January 1, 20x0, $18on December 31, 20x0, $15 for 12/31/x1, $22 for 12/31/x2, $32 for12/31/x3 and $28 for 12/31/x4. The company does not pay a dividend.The standard deviation for their stock is 14%, beta is 1.25, andcorrelation coefficient is -0.30.

Finally Daryl met the management team at Pork, Byrd and Belly.In spite of the name, this was not an agricultural company, but aheavy construction company with major government contracts forroads and bridges. The company has had some very successfulcontracts in the past which have led to great growth, but theirrate of growth has slowed a little in the last couple of years.

The stock price for Pork, Byrd and Belly was $10 on January 1,20x0, $15 on December 31, 20x0, $25 for 12/31/x1, $30 for 12/31/x2,$28 for 12/31/x3 and $25 for 12/31/x4. In the year 20x0 they paid adividend of $0.80, $0.90 in 20x1, $1.20 in 20x2, $0.50 in 20x3 andthat amount again in 20x4. The standard deviation for their stockis 20%, beta is 1.05, and correlation coefficient is .45.

Since these are all small regional companies, Daryl uses theRussell 4000 index as a measure of the market standard. He likes tocompare the performance of his companies against this index alongwith other criteria to determine if a company stock price offers agood value.

The index price for the Russell 4000 was 1200 on January 1,20x0, 1400 on December 31, 20x0, 1800 for 12/31/x1, 1750 for12/31/x2, 1600 for 12/31/x3 and 1700 for 12/31/x4. The standarddeviation for the index is 5%, beta is 1.0, and correlationcoefficient is 1.00. Currently the rate of return on a Treasurybill is 5.0%.

Required:

1. Compute the coefficient of variation for each stock plus themarket for the 5 year period from 20x0 to 20x4.