Question

Suppose Sandi is trying to deudo which of the investments she should purchase, Investment E has a Coeffrient of variation (Cu) equal to whereas investment F'S CV is 0.3. If Sandi B a rational, risk averse investor, which investment Should she prefer to purchase, la investment E because it provides a higher total return than investment F' bl investment E, because on a relative basis, it pmidos a better return for the amount of righ that must be taken than does, arestment F, Co Investment F bocause an a relative bass, it pondos - a better return for the amount of risk that must be taken than does investment-E • d) Neither investmentment should be purchased, becaust they both have quite a bit of risk Te Bruunso both investments Loefficients of variation are o cantor than zoo, they should be considered equally desirablo

Answer 1

Ans- Option C

As a risk averse investor prefer returns with lower risks rather than returns with high risk. Since, Coefficient of variation(COV) =Standard Deviation divided by Expected return which states the volatitilty of stock in comparison with its return. The lower the COV the better the stock as better Return with lower risk.

Hence, Investment F has a COV of 0.3 while Investment E has a COV of 1.5. Investment F should be chosen.