Question

3c. How can the risk of an asset be different when the asset is held by itself versus when it is held as a part of a group, or portfolio, of assets? (page 275 and critical thinking)

6b. Calculate the coefficient of variation for a stock with the following information. (page 281)
Average return						14.4%
Standard Deviation						12.52%
Coefficient of variation						0.87	(Solution: 0.87)
6c. If the coefficient of variation for another stock is 0.61, which stock would be more attractive to investors who are risk-averse? Explain. (critical thinking)

7b. Given that the risk-free rate is 3%, use information from 6b to calculate the Sharpe ratio for that stock. (page 281)
Risk-free rate						3%
Sharpe ratio							(Solution: 0.91)
7c. If the Sharpe ratio of another stock is 1.45, which stock is likely to be more appealing to risk-averse investors? (page 281)

Answer 1

3c
Because of diversification i.e., less than perfect posituve correlaion leading to adverse movements in one asset being partly offset by favorable movements in other

6b
Coefficient of variation=Standard deviaton/Expected retun=12.52%/14.40%=0.87

6c
Stock which has lesser coefficient of variation (0.61) is more attractive because it has lower risk for the same return

7b
Sharpe Ratio=(Return-risk free rate)/Standard Deviation=(14.4%-3%)/12.52%=0.91

7c
Stock which has higher Sharpe ratio (1.45) is more attractive as it offers higher return for the same risk