Stocks A, B, and C have expected returns of 13 percent, 13 percent, and 11 perce
ID: 2636045 • Letter: S
Question
Stocks A, B, and C have expected returns of 13 percent, 13 percent, and 11 percent, respectively, while their standard deviations are 45 percent, 32 percent, and 32 percent, respectively. If you were considering the purchase of each of these stocks as the only holding in your portfolio and the risk-free rate is 0 percent, which stock should you choose? (Hint: the Coefficient of Variation (CV) measures the risk of an investment for each 1% of expected return; in other words, the higher the CV, the greater the risk.) (Round answer to 2 decimal places, e.g. 15.25.)
Coefficient of variation of Stock A Coefficient of variation of Stock B Coefficient of variation of Stock C Stocks A, B, and C have expected returns of 13 percent, 13 percent, and 11 percent, respectively, while their standard deviations are 45 percent, 32 percent, and 32 percent, respectively. If you were considering the purchase of each of these stocks as the only holding in your portfolio and the risk-free rate is 0 percent, which stock should you choose? (Hint: the Coefficient of Variation (CV) measures the risk of an investment for each 1% of expected return; in other words, the higher the CV, the greater the risk.) (Round answer to 2 decimal places, e.g. 15.25.) Coefficient of variation of Stock A Stock A Stock B or Stock C? Choose Coefficient of variation of Stock C Coefficient of variation of Stock BExplanation / Answer
To find which is a better investment, we need to find the Coefficient of variation of all the stocks and choose the one with the highest Coefficient of variation.
Coefficient of variation = Mean / Standard Deviation.
Coefficient of variation of Stock A = .13 / .45 = .288
Coefficient of variation of Stock B = .13 / .32 = .406
Coefficient of variation of Stock C = .11 / .32 = .343
Stock B is the best option to choose.
Hope my solution solves your query.
Regards.
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