A stock has an expected return of 12 percent and a standard deviation of 25 percent. Long-term Treasury bonds have an expected return of 5 percent and a standard deviation of 9 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 = 25% / 12% = 2.08. For the bond, CV = 9% / 5% = 1.8. 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 12 Percent and a Standard