1. Stocks A, B, and C have expected returns of 14 percent, 14 percent, and 10 pe

Question

1. Stocks A, B, and C have expected returns of 14 percent, 14 percent, and 10 percent, respectively, while their standard deviations are 49 percent, 25 percent, and 25 percent, respectively. If you were considering the purchase of each of these stocks as the only holding in your portfolio and the risk-free rate is 0 percent, which stock should you choose? (Hint: the Coefficient of Variation (CV) measures the risk of an investment for each 1% of expected return; in other words, the higher the CV, the greater the risk. Round answers to 2 decimal places, e.g. 15.25.)

2.

You are considering investing in a mutual fund. The fund is expected to earn a return of 15 percent in the next year. If its annual return is normally distributed with a standard deviation of 7.0 percent, what return can you expect the fund to beat 95 percent of the time? (Round answer to 2 decimal places, e.g. 52.75%.)

Explanation / Answer

The coefficient of variation represents the ratio of the standard deviationto the men.

Stock A =49%/14% = 3.5

Stock b =25%/14% = 1.79

Stock c = 25%/10% =2.5

I would choose stock b, as it gives highest return per unit of risk

B.z value gor 95% confidence intervel is 1.96

So return is expected return - z*standard deviation

=15% - 1.96*7% = 1.28%

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