Question

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)?

Answer 1

Answer:

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%