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Standard Deviation Problem

The expected annual returns are 15% for investment 1 and 12% for investment 2. The standard deviation of the first investment's return is 10%; the second investment’sreturn has a standard deviation of 5%. Which investment is less risky based solely on standard deviation? Which investment is less risky based on coefficient ofvariation? Which is a better measure given that the expected returns of the two investments are not the same?
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Answer #1
1) solely based on standard deviation investment 2 is less risky as ( sigma2<sigma1)
2) based on coefficient of variation investment 2 is less risky as ( sigma/expected return of 2nd is less)
3) we always consider coefficient of variation for chechink the volatility (risk) of investments
answered by: Falguni Patel
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Answer #2
the second investment is less risky, since lower SD is less risky
coefficient of variation= SD/expected return

1st investment- 10/15=.667
2nd investment- 5/12=.417
more coef of variation more risky. in this case 2nd investment is less risky

because coefficient of variation captures the effects of both risk and return, it is a better measure than SD for valuing risk when the expected returns ofthe two investments are not the same.
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