Question

A stock has an expected return of 12 percent and a standard deviation of 20 percent. Long term Treasury bonds have an expected return of 9 percent and a standard deviation of 15 percent. Given this data which of the following statements is correct?

A. Both investments have the same diversifiable risk.
B. The stock investment has a better risk-return trade-off.
C. The bond investment has a better risk-return trade-off.
D. The two assets have the same coefficient of variation.

Answer 1

Answer:

D. The two assets have the same coefficient of variation.

Explanation:

the coefficient of variation = standard deviation / mean

• the coefficient of variation of the stock = 20% / 12% = 1.67
• the coefficient of variation of the treasury bonds = 15% / 9% = 1.67

As a general, the lower the coefficient of variation, the more exact is the estimated return.