Given investments A and B with the following risk return characteristics, which one would you prefer and why?
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? 
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

The best choice is Investment B because it has the lowest coefficient of variation, which means it has the lowest risk per unit of return. In other words, it is the most efficient investment in terms of risk and return. Absolute risk or relative risk cannot be used to compare investments with different returns, and a higher coefficient of variation indicates higher risk per unit of return. Therefore, option A, B and E are not the best choice.

Given Investments a and B with the Following Risk Return