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Homework answers / question archive / Most risk and return models in finance define risk in terms of variance or standard deviation of actual returns around an expected return
Most risk and return models in finance define risk in terms of variance or standard deviation of actual returns around an expected return. Assume that you were looking at the following investments and you can pick only one If your objective were to maximize return, which one would you take?
Select one:
a. Investment D: Expected Return = 10%, Standard deviation = 15%
b. Investment C: Expected Return = 10%, Standard deviation = 10%
c. Investment A: Expected Return = 2%, Standard deviation = 0%
d. Investment B: Expected Return = 20%, Standard deviation = 25%
Clear my choice
please quick on
I have only 5 min
Ans : In this case we should first find Co-efficient of variation = s.d. / mean *100
|
Stock |
S.D.(a)% |
Mean(b)% |
C.V. (a*100 /b) |
|
|
A |
15 |
10 |
150% |
Same Return - High C.V. |
|
B |
10 |
10 |
100% |
Same Return – Low C.V. |
|
C |
0 |
2 |
0 |
Lowest Return - Reject |
|
D |
25 |
20 ( Highest Return) |
125% Moderate |
|
In Stock A and B , B is better , since return is same but variation is less(Low risk) .
But by marginally increasing variation (125 from 100%) our return is increasing from 10 to 20%(Double ) ,.
Hence Stock D is Best
