Question

Analysis of portfolio returns over a 20-year period showed the statistics below.


(a) Calculate and compare the coefficients of variation. (Round your answers to 2 decimal places.)

Investment		Mean Return				Standard Deviation				Coefficient of Variation
Venture funds (adjusted)			21.4				13.8					%
All common stocks			12.7				15.0					%
Real estate			13.6				17.3					%
Federal short-term paper			7.6				1.8					%

(b) Why would we use a coefficient of variation, and why not just compare the standard deviations? (select answer below)
  

• The standard deviations are an "absolute", not relative, measure of dispersion. It is best to use the CV when comparing across variables that have different means.

• Standard deviation can only be compared when the variables have different units of measure.

• The standard deviations are relative and not absolute measures of dispersion.

(c) What do the data tell you about risk and return at that time period? (select answer below)
  

• Federal short-term paper has the lowest standard deviation and hence the greatest risk; real estate, the lowest risk.

• Federal short-term paper has the lowest CV and hence the greatest risk; real estate, the lowest risk.

• Venture funds have greater risk and lower return than common stocks based on the CV.

• Venture funds have lower risk and greater return than common stocks based on the CV.

Answer 1