Question

MULTIPLE CH0ICE. Choose the one alternative that best completes the statement or answers the question. 1) 1) Which of the following investments is clearly preferred to the others for a risk-averse investor? Investment A 14% 12% В 22% 20% 18% 16% A) Investment A B) Investment B 9Investment C D) cannot be determined without additional information 2) Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Wendy's holding period return is A) 16.5% B) 21.1 % D) 15.0% C) 17.6% 3) 3) You must add one of two investments to an already well- diversified portfolio. Security B Expected Return 12 % Standard Deviation of Returns 11% Beta 1.5 Security A Expected Return 14% Standard Deviation of Returns 15.0% Beta 1.5 If you are a risk-averse investor, which one is the better choice? A) Security A B) Security B C) cannot be determined with information given D) Either security would be acceptable. 21

Answer 1

Mean 14.00% 22.00% 18.00% Std dev 12.00% 20.00% 16.00% Coefficient of Variation = Std dev/Mean 0.86 0.91 0.89 A risk averse investor would prefer an investment with leasr COV So Investment A is a better option 2) Holding period return = 3.45/3-1 15.00% Both A & B has beta of 1.5. Mean Std dev 14% 15% 12% 11% Coefficient of Variation = Std dev/Mean 1.07 0.92 A risk averse investor would prefer B