Question

) Suppose that stocks offer an expected return of 18% with a standard deviation of 22%, while gold offers an expected return of 10% with a standard deviation of 30%. Given that gold offers a lower return at higher risk compared to stocks, would anyone hold gold

Answer 1

Answer:

Some people would hold gold instead of stocks because even if the average expected return of gold is a lot lower than the average expected return of stocks (10% vs 18%), the standard deviation of gold is 30%, while that of stocks is 18%.

This means that while on average stocks earn the investor a higher average return, in some cases, gold earns even higher returns to investors. However, the probability of getting those high returns on gold is still lower, which makes gold a riskier investment.