Question

As a financial advisor, you are assigned a new client who is considering investing in one of two stocks, A or B.

The table below shows information about the performance of stocks A and B last year.

	Return	Standard Deviation
Stock A	15 %	8.3%
Stock B	14%	2.1%

As a financial advisor, are there factors other than return and risk that should be considered in making this decision?

Based on these factors, what stock would you recommend to the client?

What reasons will you convey to your client to justify your decision in recommending this stock?

How will this recommendation impact the client?

Answer 1

1) Risk and Return are the major ones to be considered in making the decisions

2) I would suggest stock B

3) Because, if you are taking the call using the return alone, then the obvious choice will be stock A. Where as, if you are also looking at standard deviation, it is very high for stock A compared to stock B.

In general standard deviation represents, dispersion for the mean value, as the stock A has higher standard deivation, the probability that it will get a return other than 15% is very high. It deviates from the given return more than the stock B. So, some times it may earn higher return than 15% and some times lower than 15%. As a whole, investing in stock A is all about taking risk.

Where as stock B is having a return of 14 % and standard deviation of 2.1%, so the probability that it will land up at the stated return is much higher than Stock A.

So, I will choose stock B