Question

Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.
  

Investments	Returns: Expected Value			Standard Deviation
Buy stocks	$	9,580		$	6,500
Buy bonds		7,610			2,600
Buy commodity futures		17,100			29,300
Buy options		19,200			16,400

a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.)
  

Answer 1

The formula for coefficient of variation is, CV = Standard Deviation/Expected Return

Stocks:

CV = 6500/9580 = 0.678

Bonds:

CV = 2600/7610 = 0.341

Commodity Futures:

CV = 29300/17100 = 1.713

Options:

CV = 16400/19200 = 0.854

Investments having high standard deviation will be having high coefficient of variation as standard deviation is in nuemerator.So, high standard deviation means higher risky and highly volatile. So high CV, means they are more risky and low CV means they are less risky. So, those who are risk averse choose lowest CV investment and who enjoys taking risk will invest in highest CV ones

Since, Tim is risk averse who invests in bonds and Mike enjoys risk taking he invest in commodity futures