Asset A has a coefficient of variation of 1.2 and asset B has a coefficient of variation of 1.0. Based on this information, an individual would choose asset ____ if he or she wishes to maximize return for a given level of risk.
A) A
B) B
C) A & B in equal proportions
D) A & B in proportions of 1.2 to 1.0

Question

Quizplus · Accepted Answer

The coefficient of variation (CV) measures the ratio of the standard deviation of an asset's returns to its expected return. A lower CV indicates that an asset's returns are less volatile compared to its expected return, while a higher CV indicates the opposite. Since the individual wants to maximize return for a given level of risk, they would choose the asset with the higher expected return, which in this case is asset B with a lower CV of 1.0. Asset A may have a higher potential return, but it also has higher volatility, which increases the risk. Therefore, asset B is the better choice.

Asset a Has a Coefficient of Variation of 1