Question

Given the following investment returns from two stocks: Stock A: 5%,6%,7%,9%,23% (mean = 10% and standard...

Given the following investment returns from two stocks:
Stock A: 5%,6%,7%,9%,23% (mean = 10% and standard deviation = 7.416%)
Stock B: 50%,60%,70%,90%,230% (mean = 100% and standard deviation = 74.16%).
Which stock has the greatest absolute risk?

Which stock should a risk averse investor choose?

Two correct answers, all or nothing.

1.

Stock A has the greatest absolute risk.

2.

Stock B has the greatest absolute risk.

3.

Both stocks have the same amount of absolute risk.

4.

A risk averse investor should invest in Stock A.

5.

A risk averse investor should invest in Stock B.

6.

A risk averse investor should invest in either of the two stocks since they are equally attractive.

Homework Answers

Answer #1

Answer) We can determine the absolute risk with the help of standard deviation.

By definition as the standard deviation increase, absolute risk also increase.

So greater the standard deviation, greater the absolute risk

Therefore,

(2) Stock B has the greatest absolute risk.

As we know that risk-averse investor doesn't like risk

Therefore,

A risk-averse investor should choose stock A to invest, as there is a less absolute risk.

(4) A risk-averse investor should invest in stock A.

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