The expected returns for Stocks A, B, C, D, and E are 7 percent, 10 percent, 12 percent, 25 percent, and 18 percent, respectively. The corresponding standard deviations for these stocks are 12 percent, 18 percent, 15 percent, 23 percent, and 15 percent, respectively. Which one of the securities should a risk-averse investor purchase if the investment will be held in isolation (by itself) ?

Question

Lashon

Business

23 February, 11:59

The expected returns for Stocks A, B, C, D, and E are 7 percent, 10 percent, 12 percent, 25 percent, and 18 percent, respectively. The corresponding standard deviations for these stocks are 12 percent, 18 percent, 15 percent, 23 percent, and 15 percent, respectively. Which one of the securities should a risk-averse investor purchase if the investment will be held in isolation (by itself) ?

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Victor Dunlap · Answer 1

The securities should a risk-averse investor purchase if the investment will be held in isolation is A because It has the lowest coefficient of variation.

Explanation:

We use the co-efficient of variation to calculate the risk level of the given stocks. The coefficient of variation is the measurement of risk of return.

A B C D E

Expected Returns 7% 10% 12% 25% 18%

Standard Deviation 2% 18% 15% 23% 15%

Use Following Formula to Calculate coefficient of variation.

Coefficient of variation = (Volatility / Expected Return) x 100

As Standard Deviation represent the volatility.

Coefficient of variation = (Standard Deviation / Expected Return) x 100

A. Coefficient of variation = (2% / 7%) x 100 = 28.57%

B. Coefficient of variation = (18% / 10%) x 100 = 180%

C. Coefficient of variation = (15% / 12%) x 100 = 125%

D. Coefficient of variation = (23% / 25%) x 100 = 92%

E. Coefficient of variation = (15% / 18%) x 100 = 83.33%