Topic 4: Risk and Return

A risk taker is a person who is not willing to take larger risk.

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Standard deviation is a relative measure of risk.

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Coefficient of variation is a relative measure of risk per unit of expected return.

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Market risk can be reduced through diversification.

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A risky investment would usually has higher standard deviation.

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Risk is the chance that the actual return deviate from the expected return.

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Realized return is synonymous with expected return.

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The expected return on an investment is equal to the realized return .

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Ahmad is considering investing in stocks. Which is the less risky investment?

• Stock A: SD = 10%; E(R) = 10%

• Stock B: SD = 6%; E(R) = 10%

• Stock C: SD = 8%; E(R) = 12%

• Stock D: SD = 20%; E(R) = 24%

Which is the riskiest investment?

• Investment A: ER = 22%; SD = 10%

• Investment B: ER = 24%; SD = 12%

• Investment C: ER = 21%; SD = 14%

• Investment D: ER = 20%; SD = 11%