Share A:Possible outcomesProbability (%)Return (%)Pessimistic208Most likely3514Optimistic4525 Share B:The expected return of share B is 15% and its standard deviation is 8%. Assume that you are a highly risk averse investor; determine the share(s) that you would prefer to invest in based on the coefficient of variation (CV) of the shares above?Select one:a.Shares A and B, as they have the same CVb.Share Ac.Share Bd.Share A and B, as they have different CV
Question
Share A:Possible outcomesProbability (%)Return (%)Pessimistic208Most likely3514Optimistic4525 Share B:The expected return of share B is 15% and its standard deviation is 8%. Assume that you are a highly risk averse investor; determine the share(s) that you would prefer to invest in based on the coefficient of variation (CV) of the shares above?Select one:a.Shares A and B, as they have the same CVb.Share Ac.Share Bd.Share A and B, as they have different CV
Solution
To answer this question, we first need to calculate the Coefficient of Variation (CV) for both shares. The CV is a measure of relative variability. It is the ratio of the standard deviation to the mean (average).
For Share A, we don't have the standard deviation directly given. However, we can calculate the expected return. The expected return is the sum of the returns of each outcome multiplied by their respective probabilities.
Expected return for Share A = (0.20 * 8) + (0.35 * 14) + (0.45 * 25) = 1.6 + 4.9 + 11.25 = 17.75%
Without the standard deviation for Share A, we can't calculate the CV for Share A.
For Share B, the expected return is given as 15% and the standard deviation is given as 8%.
CV for Share B = Standard Deviation / Expected Return = 8 / 15 = 0.53 or 53%
Since we don't have the CV for Share A, we can't compare it with Share B. Therefore, we can't definitively say which share a highly risk averse investor would prefer based on the CV.
So, the answer is none of the options given in the question.
Similar Questions
A share has a beta of 1.1 and a standard deviation of 16.67%. It also has an expected return of 13.30%. Calculate the coefficient of variation (CV).Select one:a.2.51b.9.70c.0.16d.1.25
Which statement is correct regarding the following information? - Shares in company A have an expected return of 8%, standard deviation of 15% and beta coefficient of 1.3- Shares in company B have an expected return of 12%, standard deviation of 25% and beta coefficient of -0.75.Group of answer choicesIn a single asset portfolio, security A would be riskier because its coefficient of variation is higher than security B.In a single asset portfolio, security B would be riskier because its coefficient of variation is higher than security ASecurity A is less risky if held in a diversified portfolio because of its positive correlation with market portfolioSecurity B is riskier if held in a diversified portfolio because of its beta coefficient of –0.75None of the options is correct.
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.75. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. Group of answer choices17.74%21.59%20.39%19.11%
An investor has a $200,000 portfolio of which $120,000 has been invested in Stock A and the remainder in Stock B. Other characteristics of the portfolio are shown in the accompanying table. Stock A Stock BE(RA ) = μA = 8.4% E(RB ) = μB = 6.5%σA = 11.82% σB = 7.19%Cov(RA,RB ) = σAB = 17.10% The correlation coefficient between the returns on Stocks A and B is _____.Multiple Choice0.80−0.174.970.20
The covariance of returns is -0.0120. The standard deviation of a portfolio is 5%, whose 60% is invested in Security I and 40% in Security II. The variance of security A is 80% of security B. The variances of the securities should respectively be Question 31Answera.12.14% for A & 13.57 for Bb.1.47% for A & 1.84% for Bc.12.14% for A and 15.17% for B
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.