Question

Martha is looking into investing a portion of her recent bonus into the stock market. While researching different companies, she discovers the following standard deviations of one year of daily stock closing prices. Handy Prosthetics: Standard deviation of stock prices =$1.05 El Lobo Malo Incorporated: Standard deviation of stock prices =$9.82 Based on the data and assuming these trends continue, which company would give Martha a stable long-term investment?

Answer 1

Answer:

Martha

Based on the data and assuming these trends continue,

Investment in Handy Prosthetics is preferred as it would give Martha a stable long-term investment.

Explanation:

a) Data:

                                                          Handy         El Lobo Malo

                                                       Prosthetics    Incorporated

Standard deviation of stock prices = $1.05            $9.82

b) The above standard deviations measure the spread of the stock prices over their daily stock closing prices in one year.  The Handy Prosthetics' stock does not fluctuate as much as the El Lobo Malo's stock.  This reduced fluctuation in prices makes it a more stable investment than El Lobo Malo's stock.  Therefore, Martha should prefer the Handy's stock to the El Lobo Malo's stock.