Question

You have been given the expected return data shown in the first table on the three assets - F, G, and H - over the period 2016-2019

	Expected Return	Expected Return	Expected Return
Year	Asset F	Asset G	Asset H
2016	16%	17%	14%
2017	17	16	15
2018	18	15	16
2019	19	14	17

Using these assets, you have isolated the three investment alternatives shown in the following table.

Alternative	Investment
1	100% of asset F
2	50% of asset F and 50% of asset G
3	50% of asset F and 50% of asset H

A. Calculate the expected return over the 4-year period for each of the three alternatives.

B. Calculate the standard deviation of returns over the 4-year period for each of the three alternatives.

C. Use your findings in parts A and B to calculate the coefficient of variation for each of the three alternatives.

D. On the basis of your findings, which of the three investment alternatives do you recommend? Why?

Answer 1

Standard deviation can be calculated using STDEV.S function in excel. Average expected return over 4 year period can be calculated using simple AVERAGE function in excel.

Coefficient of variation = Standard deviation / Mean

D) Alternative 2 is a better investment as its Coefficient of variation is lower than other two alternatives. Coefficient of Variation is a useful statistic for comparing the degree of variation from one data series to another. It allows you to determine how much volatility, or risk, you are assuming in comparison to the amount of return you can expect from your investment. Lower the ratio better your risk return trade-off.