Question

The expected rate of return for the stock of cornhusker enterprises is 20%, with a standard deviation of 15%. the expected rate of return for the stock of mustang associates is 10%, with a standard deviation of 9%. the stock with the worse risk/return relationship is

Answer 1

Answer : The risk reward ratio for Cornhusker Enterprises is 0.75, while that for Mustang Associates is 0.90.

Since the risk-reward ratio for Mustang Associates is higher, it's risk-reward ratio is worse.

In this question, we first need to calculate the risk-return ratio for both the stocks.

The risk-reward ratio express risk (standard deviation) per unit of expected return (mean).

We can calculate the risk-reward ratio (coefficient of variation) by using the following formula:

`Risk-reward ratio = (\sigma )/(\mu)`

where

σ = Standard deviation

μ = Expected Return on a security.

Cornhusker Enterprises:

`Risk -reward Ratio = (0.15/0.20)`

`Risk- reward ratio = 0.75`

Mustang Associates:

`Risk -reward Ratio = (0.09/0.10) *100`

`Risk- reward ratio = 0.90`