Question

QUESTION 28 The expected returns, standard deviation, and coefficient variation of Stocks A and B are given below. If you are risk adverse investor, which stock will you buy? | Stocks | Expected Return Std. Deviation Coefficient Variation, CV A 15% 4% 0.27 B 12% 3% 0.25 O Stock A since expected return is higher Stock B since standard deviation is lower O Stock A since coefficient variation is higher Stock B since coefficient variation is lower O Need additional information

Answer 1

Solution:

The coefficient of variation is a measure of risk per unit of return or reward.

The higher the coefficient of variation, higher is the risk per unit of return.

The lower the coefficient of variation, lower is the risk per unit of return.

Since Stock B has a lower Coefficient of Variation at 0.25, it implies that it has the lower risk per unit of return.

Thus a risk adverse investor, should buy Stock B.

The solution is Option 4 = Stock B since coefficient variation is lower.