Question

A stock has an expected return of 12 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 15 percent. Given this data, which of the following statements is correct?

Group of answer choices

Both investments have the same diversifiable risk.

The two assets have the same coefficient of variation.

The bond investment has a better risk-return trade-off.

The stock investment has a better risk-return trade-off.

Answer 1

The first statement is incorrect - The bond has zero diversifiable risk, as it is a risk-free Treasury bond.

The second statement is correct

Coefficient of variation = standard deviation / expected return

Coefficient of variation of stock = 20% / 12% = 1.67

Coefficient of variation of bond = 15% / 9% = 1.67

The third and fourth statements are incorrect. The risk-return trade-off is measured by coefficient of variation, which is equal for both investments.