Given investments A and B with the following risk return characteristics,which one would you prefer and why?
$\begin{array}{ccc}
\text { Investment } & \text { Expected Retumn } & \begin{array}{c}
\text { Standard Deviation } \
\text { of Expected Returns }
\end{array} \
\hline \mathrm{A} & 12.2 \% & 7 \% \
\mathrm{R} & 8.8 \% & 5 \%
\end{array}$

A) Investment A because it has the highest expected return.
B) Investment A because it has the lowest relative risk.
C) Investment B because it has the lowest absolute risk.
D) Investment B because it has the lowest coefficient of variation.
E) Investment A because it has the highest coefficient of variation.

Question

Given investments A and B with the following risk return characteristics,which one would you prefer and why?
$\begin{array}{ccc}
\text { Investment } & \text { Expected Retumn } & \begin{array}{c}
\text { Standard Deviation } \
\text { of Expected Returns }
\end{array} \
\hline \mathrm{A} & 12.2 \% & 7 \% \
\mathrm{R} & 8.8 \% & 5 \%
\end{array}$

A) Investment A because it has the highest expected return.
B) Investment A because it has the lowest relative risk.
C) Investment B because it has the lowest absolute risk.
D) Investment B because it has the lowest coefficient of variation.
E) Investment A because it has the highest coefficient of variation.

Quizplus · Accepted Answer

Coefficient of Variation = Standard Deviation of Returns/Expected Rate of Return CV_A = 7%/12.2% = 0.573 CV_B= 5%/8.8% = 0.568 Investment B has the lowest coefficient of variation and would be preferred.

Given Investments a and B with the Following Risk Return