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

Higher the standard deviation (risk) higher must be the expected return.

Stock A and Stock B both have the same expected return, but Stock A has a higher total risk, as measured by the standard deviation of its returns.

So, I would recommend Stock B to my client. The reason is simple, you can expect 15% return by taking a lower risk than that of Stock A.

Stock B is not going to be as volatile as the Stock A, so the client will be relatively peaceful. The recommendation is a sound financial decision and the client would be happy with outcome of this recommendation.

Can you please upvote? Thank You :-)