Share
Explore BrainMass

Risk Investments

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.

$2.19