Question

Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 12 percent and standard deviation of 38 percent. The average return and standard deviation of Idol Staff are 15 percent and 26 percent, and of Poker-R-Us are 9 percent and 30 percent. Rank Stock

Answer 1

Solution:

Risk based ranking from Highest to Lowest:

Rank	Stock
1	Poker-R-Us
2	Rail Haul
3	Idol Staff

Notes:

1)

Stocks	Standard Deviation(a)	Average Return(b)	Coefficient of Variation(a/b)
Rail Haul	38	12	3.17
Idol Staff	26	15	1.73
Poker-R-Us	30	9	3.33

2) We have given the risk ranking based on Coefficient of Variation, because it is ratio of standard deviation to mean.

3) If Coefficient of Variation is more, which means greater the dispersion around the mean and lower the Coefficient of Variation, the more precise the estimate. So, Stock with low Coefficient of Variation has more chance to meet estimation and less risk and high Coefficient of Variation stock has less chance to meet estimation and more risk.