Question

Investment A has a standard deviation of 12% and an expected return of 10%. Investment B has a standard deviation of 18%, but an expected return of 12%. Which project is preferable from a risk return point of view? Please answer quantitatively, by calculating the coefficient of variation of the investments.

Answer #1

Coefficient of Variation(CV) is a measure of volatility or risk
and explains how much risk one is taking for the given
return.

CV= Standard deviation_{/Average/Expected Return}

Investment A:

Statndard Deviation: 12%

Expected Return= 10%

CV= 12%/10% = 1.2

CV for Investment A is 1.2

Investment B

Statndard Deviation: 18%

Expected Return= 12%

CV= 18%/12% = 1.5

CV for Investment B is 1.5

Since the coefficient of variation gives the risk/return ratio, the
lower the ratio the lower will the risk per return so in this case
Investment A with CV=1.2 is a good option to invest

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