Investment A has an expected value of 5 and a standard deviation of 2. Investment B has an expected value of 10 and a standard deviation of 5. Using the coefficient of variation approach to comparing these two investments,
A) Investment A would be selected because it has the larger coefficient of variation.
B) Investment B would be selected because it has the larger coefficient of variation.
C) Investment A would be selected because it has the smaller coefficient of variation.
D) Investment B would be selected because it has the smaller coefficient of variation.

Question

Quizplus · Accepted Answer

The coefficient of variation (CV) is calculated as the standard deviation divided by the expected value. For Investment A, CV = 2 / 5 = 0.4. For Investment B, CV = 5 / 10 = 0.5. Investment A has the smaller coefficient of variation, indicating it offers a better risk-reward ratio, hence it would be selected.

Investment a Has an Expected Value of 5 and a Standard