The annual expected return for Coke is 0.1307, while the annual expected for Pepsi Company is 0.0482. This means that Coke offers an expected higher return for an investor that Pepsi Company. However, the investment that an individual is willing to make is also measured by the risk attached to the investment. The risk that is attached to an investment means the potential variation of actual returns from expected returns, a factor that is measured by the variance and standard deviation of an asset or portfolio. From an analysis of Coke and Pepsi Companies, it is evident that Pepsi has a higher standard deviation and variance, albeit by a small percentage. The standard deviation and variance for Pepsi are 0.048 and 0.0024 respectively, while the standard deviation and variance for Coke are 0.046 and 0.0027 respectively. This means that Pepsi’s stock has a higher deviation from expected return, so an investor who is risk averse would prefer to invest in Coke. The other factor that is used to determine the expected return of a stock is the beta, which refers to the relative volatility of the stock to the market. From the analysis, it is evident that Coke has a higher beta of 0.54 compared to Pepsi’s beta of 0.52, which indicates that Coke’s Stock is more volatile in the market. The covariance of two stocks in a market indicates that extent to which the returns for the two investments move in relation to each other. The covariance for Coke and Pepsi is low at 0.002, which means that the stocks co-vary. An investor with an aim of diversifying stock should not invest in the two stocks together. The correlation of stocks refers to the extent to which the prices of the two stocks affect each other, and from the analysis, a correlation of 0.7 indicates that the prices of the two stocks are strongly correlated, since the two stocks are strong competitors. Coke and the Market The annual return for Coke is higher than the annual return displayed by the market, which indicates that Coke is performing better than the market. The annual return for coke stands at 0.1307, while the annual return for the market is -0.009. However, the market has a lower risk than Coke, as can be seen from the standard deviations of the two portfolios. The variance and standard deviations for the two are 0.0027 and 0.0467 respectively for Coke and 0.0030 and 0.0214 respectively for the market. This indicates that Coke has a higher chance of risk than the market, which would be the ideal choice for a risk indifferent investor. The covariance of
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