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# Risk Investments

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Based on what you know about risk, determine which is the riskier investment.

Company A has an expected rate of return of 15% and a standard deviation of 3%
Company B has an expected rate of return of 10% and a standard deviation of 2%
Company C has an expected rate of return of 25% and a standard deviation of 5%

If the correlation coefficient, p is equal to +1.0, perfectly positively correlated, has diversification worked? Yes or No Is this a risky portfolio? Yes or No

If the correlation coefficient, A is equal to -1.0, perfectly negatively correlated, has diversification worked? Yes or No Is this a risky portfolio? Yes or No

#### Solution Preview

1. When there are no clear choices i.e. return is higher with lower standard deviation, coefficient of variation is appropriate measure of risk.

Calculate coefficient of variation = standard deviation / rate of return
Company A =3%/15%=0.20
Company B =2%/10%=0.20
Company C =5%/25%=0.20

Since coefficient of variation ...

#### Solution Summary

The solution discusses risk investments and correlation coefficients.

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