Please consider the following two assets: Expected Return Standard Deviation Ass

Question

Please consider the following two assets:

Expected Return Standard Deviation

Asset 1: 12% 8%

Asset 2: 6% 15%

1). If you have capital to invest into only 1 asset, which one would you select? Why?

2). Now that you have the resource to invest into both assets, will your decision change? Why? Specifically, please state that, based on your answer to question 1), will the asset you abandon in 1) become useful this time? (e.g. if you decide to choose asset 2, so that you decide to abandon asset 1, then do you also want to abandon asset 1 when you have the resource to invest into both assets?

Explanation / Answer

Coefficient of variance = Standard deviation / Expected return

Asset 1 = 8 / 12 = 0.67

Asset 2 = 15 / 6 = 2.5

1. We ahould invest in Asset 1 because it has higher expected return with lower Coefficient of variance.

2. Even if we have resources available even then we should invest in asset 1 because because standard deviation of Asset 2 is much higher as compare to its return and investing in such an asset could be a risky game. We can utilise additional resources to invest in Asset 1.

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