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

Question

Quizplus · Accepted Answer

The coefficient of variation (CV) is calculated as the standard deviation divided by the expected return. For the stock, CV = 20% / 12% = 1.67. For the bond, CV = 15% / 9% = 1.67. Both have the same CV, indicating the same risk-return trade-off.

A Stock Has an Expected Return of 12 Percent and a Standard