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.

	(Average) Return	Standard Deviation
Stock A	15%	8.3%
Stock B	15%	2.1%

1. What factors would you consider as a financial advisor in making decisions about the data above?
2. Based on these factors, what stock would you recommend to the client?
3. What reasons will you convey to your client to justify your decision in recommending this stock?
4. How will this recommendation impact the client?

Answer 1

Part 1:
We would consider the returns and standard deviation (risk) factors given in the data. Apart from the given factors, some other factors that we should consider includes the type of stock, past performance and future expectation of the stock returns, share price etc.

Part 2:

Based on returns and standard deviation (risk) factors given in the question, stock B should be recommended to the client.

Part 3:

Reasons to recommend stock B:
Average return of both stock A and stock B are same, however standard deviation of stock B is less than stock A. This means that the risk factor on stock B is less compared to stock A for similar returns.

Part 4:

With a standard deviation of 2.1%, an investor can earn 2.1% more than the expected return or 2.1% less than the expected return.