Question

Given the following expected returns and risk, which security will be ranked number one.

Securities            Standard Deviation                     Expected Return

QVC                          15%                                           18%

Apple                        30%                                           40%

Google                      35%                                           42%

Ann Taylor                 20%                                           12%

A. QVC, because it has the lowest risk

B. Google, because it has the highest return

C.Apple, because it has the lowest coefficient of variation

D. Ann Taylor, because it has the highest coefficient of variation

Answer 1

Securities	Standard Deviation	Expected Return	Co-efficient of variation
QVC	15%	18%	0.83
Apple	30%	40%	0.75
Google	35%	42%	0.83
Ann Taylor	20%	12%	1.67

Co-efficient of variation = standard deviation / Expected return

Returns and risk should be viewed in relative terms and not in absolute terms.

Therefore company with highest risk adjusted returns should be selected.

Risk adjusted returns = Expected returns / Standard deviation

Therefore company will lowest co-efficient of variation should be selected.

Therefore option C is correct.

Apple, because it has the lowest coefficient of variation