39. The historical returns for two investments-A and B-are summarized in the following table for the period 2016 to 2020,Use the data to answer the questions that follow.a. On the basis of a review of the return data, which investment appears to be more risky? Why?b. Calculate the standard deviation for each investment's returns.c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observationin part a.Review OnlyClick the icon to see the Worked Solution.a. On the basis of a review of the return data, which investment appears to be more risky? Why? (Choose the best answerbelow.)O A. The riskier investment appears to be investment B, with returns that vary widely from theaverage relative to investment A, whose returns show less deviation from the average.O B. Investment A and investment B have equal risk because the average returns are the same.O C. The riskier investment appears to be investment A, with returns that vary widely from theaverage relative to investment B, whose returns show less deviation from the average.O D. The riskier investment appears to be investment B, with returns that are closer to the averagerelative to investment A, whose returns are farther from the average.b. The standard deviation for investment A is%. (Round to two decimal places.)The standard deviation for investment B is%. (Round to two decimal places.)c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observationin part a. (Choose the best answer below.)O A. Investment A is more risky than investment B, which does not support the conclusion reachedin part a.B. Investment A is more risky than investment B, which confirms the conclusion reached in partc. fivestment B is more risky than investment A, which confirms the conclusion reached in parta.D. Investment B is more risky than investment A, which does not support the conclusion reachedin part a.3: Data TableAВYearRate of Return201618.1%9.4%20170.6%10.9%20189.6%9.7%201925.2%14.8%20208.5%17.2%Average12.4%12.4%(Click on the icon located on the top-rightcorner of the data table below in order tocopy its contents into a spreadsheet.)O O

Risky security is a security that has returns more volatile than the market and its return fluctuates largely from the average return.The correct option is C) The riskier investment appears to be investment A, with a return that varies widely from the average relative to investment B. Whose returns show less deviation from the average. Riskier security is a security whose returns vary largely from the average return, as we can notice in the above data returns from investment A are more deviating from the average of 12.4%. Hence investment A is riskier. b) According to the question, we need to calculate the standard deviation. Standard deviation is the measure of dispersion, the Investment with a higher level of standard deviation is riskier than the investment with a lower standard deviation. Standard deviation=∑n=n(x-mean of x)2n We need to calculate by the following table, Investment A YEAR Return X-MEAN OF X (X-MEAN OF X)2 2016 18.1% 5.7 32.49 2017 0.6% -11.8 139.24 2018 9.6% -2.8 7.84 2019 25.2% 12.8 163.84 2020 8.5% -3.9 15.21 MEAN 12.4% 0 TOTAL=358.62 ∑n=n(x-mean of x)2= 358.62 n = 5 Standard deviation =358.625Standard deviation =71.724Standard deviation =8.469 The standard deviation of investment A is 8.469% Investment B YEAR Return X-MEAN OF X (X-MEAN OF X)2 2016 9.4% -3 9 2017 10.9% -1.5 2.25 2018 9.7% -2.7 7.29 2019 14.8% 2.4 5.76 2020 17.2% 4.8 23.04 MEAN 12.4% 0 47.34 ∑n=n(x-mean of x)2= 47.34 n = 5 Standard deviation =47.345Standard deviation =9.468Standard deviation =3.0770 The standard deviation of stock B is 3.0770%c) The correct option is b) Investment A is riskier than investment B. This confirms the conclusion of part A. The standard deviation shows that an Investment with a higher level of standard deviation is riskier than an investment with a lower standard deviation. The standard deviation of investment A is 8.469% and the Standard deviation of investment B is 3.0770%. Because the standard deviation of A is more than standard deviation of B, investment A is riskier.

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3 The historical returns for two investments-A and B-are summarized in the following table for the period 2016 to 2020, Use the data to answer the questions that follow. a. On the basis of a review of the return data, which investment appears to be more risky? Why? b. Calculate the standard deviation for each investment's returns. c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observation in part a.

3 The historical returns for two investments-A and B-are summarized in the following table for the period 2016 to 2020, Use the data to answer the questions that follow. a. On the basis of a review of the return data, which investment appears to be more risky? Why? b. Calculate the standard deviation for each investment's returns. c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observation in part a.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

3
9. The historical returns for two investments-A and B-are summarized in the following table for the period 2016 to 2020,
Use the data to answer the questions that follow.
a. On the basis of a review of the return data, which investment appears to be more risky? Why?
b. Calculate the standard deviation for each investment's returns.
c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observation
in part a.
Review Only
Click the icon to see the Worked Solution.
a. On the basis of a review of the return data, which investment appears to be more risky? Why? (Choose the best answer
below.)
O A. The riskier investment appears to be investment B, with returns that vary widely from the
average relative to investment A, whose returns show less deviation from the average.
O B. Investment A and investment B have equal risk because the average returns are the same.
O C. The riskier investment appears to be investment A, with returns that vary widely from the
average relative to investment B, whose returns show less deviation from the average.
O D. The riskier investment appears to be investment B, with returns that are closer to the average
relative to investment A, whose returns are farther from the average.
b. The standard deviation for investment A is
%. (Round to two decimal places.)
The standard deviation for investment B is
%. (Round to two decimal places.)
c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observation
in part a. (Choose the best answer below.)
O A. Investment A is more risky than investment B, which does not support the conclusion reached
in part a.
B. Investment A is more risky than investment B, which confirms the conclusion reached in part
c. fivestment B is more risky than investment A, which confirms the conclusion reached in part
a.
D. Investment B is more risky than investment A, which does not support the conclusion reached
in part a.
3: Data Table
A
В
Year
Rate of Return
2016
18.1%
9.4%
2017
0.6%
10.9%
2018
9.6%
9.7%
2019
25.2%
14.8%
2020
8.5%
17.2%
Average
12.4%
12.4%
(Click on the icon located on the top-right
corner of the data table below in order to
copy its contents into a spreadsheet.)
O O

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