As a financial advisor, you are assigned a new client who is considering investi

Question

As a financial advisor, you are assigned a new client who is considering investing in one of two stocks, A or B.

The table below shows information about the performance of stocks A and B last year.

Return

Standard Deviation

Stock A

15 %

8.3%

Stock B

14%

2.1%

1. As a financial advisor, are there factors other than return and risk that should be considered in making this decision?

2. Based on these factors, what stock would you recommend to the client?

3. What reasons will you convey to your client to justify your decision in recommending this stock?

4. How will this recommendation impact the client?

Return

Standard Deviation

Stock A

15 %

8.3%

Stock B

14%

2.1%

Explanation / Answer

Answer 1: As a Financial advisor we must consider the Beta factor of the securities. The sensitivity of the security to the movements of the market is known as the Beta coefficient of the security.

  As a Financial advisor we must consider the risk free rate of return

Answer 2 : Based on above factors, We suggest the "Stock B" for imvestment to the client.

Answer 3 : Return of stock 'B' is slightly less than stock 'A' But risk facor of stock 'B' is much lower than the stock 'A'.

Answer 4 : Client consider why they invest in stock 'A' to earn 1% more than stock 'B' with 6.3% higher risk. So, Client will be invest in stock 'B'.

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