The expected annual returns are 12% for investment 1 and 14% for investment 2. T

Question

The expected annual returns are 12% for investment 1 and 14% for investment 2. The standard deviation of investment return is 11%, the second investment's return has a standard deviation of 5%. Which investment is less risky based solely on standard deviation? Which investment is less likely based on coefficient of variation? Which is a better measure given the expected returns of the two investments are not the same?

WHich investment is less risky based on standard deviation?

_ (Investment 1 or 2) is less risky because the standard deviation is_ (lower or higher)

Which investment is less risky based on coefficient of variation?

_ (investment 1 or 2) is less risky because its coefficient of variation is_ (lower or Higher).

WHich is a better measure that the expected returns on two investments are not the same?

Coeffiecient of variation or Standard deviation.

Explanation / Answer

Expected annual returns for investment 1 = 12%

Standard deviation for investment 1 = 11%

Coefficient of variation = Standard deviation / Average return

= 11% / 12%

= 0.92

Coefficient of variation for investment 1 is 0.92.

Again,

Expected annual returns for investment 2 = 14%

Standard deviation for investment 2 = 5%

Coefficient of variation = Standard deviation / Average return

= 5% / 14%

= 0.36

Coefficient of variation for investment 2 is 0.36.

a.

Investment 2 is is less risky because the standard deviation is lower.

b.

Investment 2 less risky based on coefficient of variation.

c.

Coefficient of variation measures the relationship between expected return and standard deviation. So, Coefficient of variation is a better measure that the expected returns on two investments are not the same.

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