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15 July, 08:36

The expected returns for Stocks A, B, C, D, and E are 7 percent, 10 percent, 12 percent, 25 percent, and 18 percent, respectively. The corresponding standard deviations for these stocks are 12 percent, 18 percent, 15 percent, 23 percent, and 15 percent, respectively. Which one of the securities should a risk-averse investor purchase if the investment will be held in isolation (by itself) ?

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  1. 15 July, 12:14
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    The securities should a risk-averse investor purchase if the investment will be held in isolation is A because It has the lowest coefficient of variation.

    Explanation:

    We use the co-efficient of variation to calculate the risk level of the given stocks. The coefficient of variation is the measurement of risk of return.

    A B C D E

    Expected Returns 7% 10% 12% 25% 18%

    Standard Deviation 2% 18% 15% 23% 15%

    Use Following Formula to Calculate coefficient of variation.

    Coefficient of variation = (Volatility / Expected Return) x 100

    As Standard Deviation represent the volatility.

    Coefficient of variation = (Standard Deviation / Expected Return) x 100

    A. Coefficient of variation = (2% / 7%) x 100 = 28.57%

    B. Coefficient of variation = (18% / 10%) x 100 = 180%

    C. Coefficient of variation = (15% / 12%) x 100 = 125%

    D. Coefficient of variation = (23% / 25%) x 100 = 92%

    E. Coefficient of variation = (15% / 18%) x 100 = 83.33%
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