Question

Which share will perform better next year? (please explain thoroughly)

The share X has average return of 6.25% and standard deviation of 19.07%

The share Y has average return of 15% and standard deviation of 27.08%

Answer 1

On the basis of average returns, we can say stock Y performs better than stock X.

However, when we compare the standard deviation of both the stocks, stock Y has a higher standard deviation than stock X.

A higher standard deviation for a stock suggests that the returns have a high degree of variation from the average return which implies that investors face a high degree of risk by investing in stock Y as the returns are more volatile compared to stock X.

Stock X has a lower standard deviation compared to stock Y and a low deviation implies that returns are more stable as the volatility associated with the stock is less.

Thus the comparison of both the stocks reveals that stock X produces stable returns and hence stock X will perform better than stock Y next year.