For Brian, who is looking to expand his portfolio, which stock is the better choice based on coefficient of variation?

For Brian, who is looking to expand his portfolio, which stock is the better choice based on coefficient of variation?

• A. Stock A, due to its higher expected return.
• B. Stock B, because it has a higher coefficient of variation.
• C. Stock A, because of its lower coefficient of variation.
• D. Stock B, due to its lower standard deviation.

Answer: (C)

The coefficient of variation (CV) is a useful measure of risk-adjusted return, calculated as the standard deviation divided by the expected return. A lower coefficient of variation indicates that the investment offers a more stable return relative to its risk. In this context, choosing Stock A due to its lower coefficient of variation suggests that Brian is prioritizing stability and lower risk in his investment strategy. By selecting the stock with the lower CV, Brian is effectively indicating he wants a more predictable and less volatile investment, which may be more appropriate for his portfolio, especially if he is looking to expand it responsibly. A lower coefficient of variation means that for each unit of risk taken, the expected return is more favorable when compared to options with higher coefficients of variation. The other choices suggest either favoring higher expected returns without considering risk adequately or opting for characteristics that may lead to more volatility. The decision to focus on the stock with the lower coefficient of variation aligns well with prudent investment strategies that prioritize risk management alongside potential returns.

The coefficient of variation (CV) is a useful measure of risk-adjusted return, calculated as the standard deviation divided by the expected return. A lower coefficient of variation indicates that the investment offers a more stable return relative to its risk. In this context, choosing Stock A due to its lower coefficient of variation suggests that Brian is prioritizing stability and lower risk in his investment strategy.

By selecting the stock with the lower CV, Brian is effectively indicating he wants a more predictable and less volatile investment, which may be more appropriate for his portfolio, especially if he is looking to expand it responsibly. A lower coefficient of variation means that for each unit of risk taken, the expected return is more favorable when compared to options with higher coefficients of variation.

The other choices suggest either favoring higher expected returns without considering risk adequately or opting for characteristics that may lead to more volatility. The decision to focus on the stock with the lower coefficient of variation aligns well with prudent investment strategies that prioritize risk management alongside potential returns.