Stock A B C D Expected Return 5% 5% 7% 6% Standard Deviation 10% 12% 1

Stock A B C D Expected Return 5% 5% 7% 6% Standard Deviation 10% 12% 12% 11% Which of the following statements is true?

A) A is a better investment than B.
B) B is a better investment than C.
C) C is a better investment than D.
D) D is a better investment than C.

ANSWER

Answer: A
Explanation: A) The only sure thing we know is that investment A is better than investment B because for the same return we get less risk. Investment B is not better than investment C because for the same risk, we get less return. We cannot say if investment C or investment D is better because that involves a personal judgment on the risk-return trade-off.