Question

Which stock has the lowest risk per return, therefore most desirable?

A) Stock A with an expected return of 12% and a standard deviation of 8%
B) Stock B with an expected return of 15% and a standard deviation of 10%
C) Stock C with an expected return of 10% and a standard deviation of 6%
D) Stock D with an expected return of 18% and a standard deviation of 12%

Answer 1

(option c) Stock C has the lowest risk per return, with a coefficient of variation of 0.6000, indicating that it is the most desirable based on this metric. Stock D has the highest expected return at 18%, but it also carries the highest risk with a standard deviation of 12%.

Step-by-step explanation:

To determine which stock has the lowest risk per return and is therefore most desirable, we can calculate the coefficient of variation for each stock which is the standard deviation divided by the expected return. The stock with the lowest coefficient of variation is considered to have the lowest risk per return.

• Stock A: Coefficient of Variation = 8% / 12% = 0.6667
• Stock B: Coefficient of Variation = 10% / 15% = 0.6667
• Stock C: Coefficient of Variation = 6% / 10% = 0.6000
• Stock D: Coefficient of Variation = 12% / 18% = 0.6667

Therefore, Stock C has the lowest risk per return and is the most desirable based on this criterion. When assessing the safest investment, this would typically be where the standard deviation (risk) is lowest, which also suggests Stock C. The riskiest investment would be the one with the highest standard deviation, pointing towards Stock D. Considering which investment has the highest expected return, on average, Stock D stands out with an 18% expected return.