Question

Risk versus Return Rank the following three stocks by their risk-return relationship, best to worst. Middle Road has an average return of 15 percent and standard deviation of 33 percent. The average return and standard deviation of Play Safe are 10 percent and 20 percent, respectively. Risk Taker are 22 percent and 55 percent.

Answer 1

We need to rank the companies with respect to the coefficient of variation.
Coefficient of variation=(Standard deviation)/Average return

For Middle Road: Coefficient of variation=33%/15%=2.2
For Play Safe: Coefficient of variation=20%/10%=2
Risk Taker: Coefficient of variation=55%/22%=2.5

Higher coefficient of variation (risk to return relationship) means higher risk compared to return. Ranking is done with respect to increasing values of coefficient of variation.
Best to worst:
Rank 1:Play Safe
Rank 2:Middle Road
Rank 3:Risk Taker