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.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
See the expected returns and standard deviation of returns for five restaurant stocks. Which one of...
See the expected returns and standard deviation of returns for five restaurant stocks. Which one of these stocks is most attractive to a risk-averse investor? Why? Stock Return Standard Deviation Super Foods, Inc. 15% 9% Crazy Snacks, Co. 12% 7.8% Jedi Fast Food, Inc. 11% 8.5% Porter’s Dining, Inc. 21% 18% Truman Restaurants 18.5% 12%
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard...
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. a. Calculate each stock’s coefficient of variation. b. Which stock is riskier for a diversified investor? c. Calculate each stock’s required rate of return. d. On the basis of the two...
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard...
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. a. Calculate each stock’s coefficient of variation. b. Which stock is riskier for a diversified investor? c. Calculate each stock’s required rate of return. d. On the basis of the two...
An investor can design a risky portfolio based on two stocks, A and B. Stock A...
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 25% and a standard deviation of return of 35%. Stock B has an expected return of 18% and a standard deviation of return of 28%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 6%. The proportion of the optimal risky portfolio that should be invested in stock B is...
An investor can design a risky portfolio based on two stocks, A and B. Stock A...
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 26% and a standard deviation of return of 39%. Stock B has an expected return of 15% and a standard deviation of return of 25%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 6%. The proportion of the optimal risky portfolio that should be invested in stock B is...
An investor can design a risky portfolio based on two stocks, A and B. Stock A...
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 37%. Stock B has an expected return of 16% and a standard deviation of return of 22%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 6%. The proportion of the optimal risky portfolio that should be invested in stock B is...
Stock A has a standard deviation of returns of 48% and Stock B has a standard...
Stock A has a standard deviation of returns of 48% and Stock B has a standard deviation of returns of 49%. Suppose you decide to invest all of your investment funds in these two stocks, and 65% is invested in Stock A. The correlation coefficient of returns for these two stocks is 0.18. What is the standard deviation of returns for the combined investment in these two stocks?
An investor can design a risky portfolio based on two stocks, A and B. Stock A...
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 16% and a standard deviation of return of 30%. Stock B has an expected return of 11% and a standard deviation of return of 15%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is...
An investor can design a risky portfolio based on two stocks, A and B. Stock A...
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 12% and a standard deviation of return of 28%. Stock B has an expected return of 9% and a standard deviation of return of 13%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is...
Consider the following four stocks: Stock Expected Return (E[r]) Standard Deviation A 0.12 0.30 B 0.15...
Consider the following four stocks: Stock Expected Return (E[r]) Standard Deviation A 0.12 0.30 B 0.15 0.50 C 0.21 0.16 D 0.25 0.21 1) According to the mean-variance dominance principle, which stock a rational and risk-averse investor will choose from stocks A, B and C? How does this choice compare with stock D?