Question

37. Stock P offers an expected return of 20%, a standard deviation of 6%, and a beta coefficient of 1.3. Stock Q offers an expected return of 16%, a standard deviation of 4%, and a beta coefficient of 0.95. Which stock would you recommend for purchase and why? a. Stock P, because it has a lower coefficient of variation b. Stock Q, because it has a lower coefficient of variation c. Stock P, because it has a higher coefficient of variation d. Stock Q, Because it has a higher coefficient of variation

Answer 1

Stock P

Expected return = 20%

Standard deviation = 6%

Coefficient of variation = Standard deviation/Expected return

= 6%/20%

= 0.3

Stock Q

Expected return = 16%

Standard deviation = 4%

Coefficient of variation = Standard deviation/Expected return

= 4%/16%

= 0.25

Since coefficient of variation is a measure of risk and lower the coefficient of variation, better it is. Since, coefficient of variation of stock Q is lower, hence stock Q should b preferred.

Hence, correct option is (b)