A stock has an expected return of 15% and a standard deviation of 20%. Long-term Treasury bonds have an expected return of 9% and a standard deviation of 11%. 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) Both investments 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. The CV for the stock is 20%/15% = 1.33, and for the bond, it is 11%/9% = 1.22. A lower CV indicates a better risk-return trade-off, so the bond investment has a better risk-return trade-off.

A Stock Has an Expected Return of 15% and a Standard