Question

The table below shows the returns and probabilities of 3 different financial assets (A, B, C). Which financial asset should be preferred according to the Risk-Return analysis? (Coefficient of Change will be calculated over Standard Deviation / Expected Return.). You can use 4 digits after the comma in your calculations.

Possibility	Return A	Return B	Return C
0,10	(-)0,09	0,01	(-)0,20
0,35	0,08	0,05	(-)0,10
0,40	0,13	0,10	0,25
0,15	0,20	0,15	0,75

Answer 1

Financial Asset A :

Possibility (P)	Return (x)	Px	x - mean of x	(x - mean)^2	P*(x - mean)^2
0.1	-9	-0.9	-19.1	364.81	36.481
0.35	8	2.8	-2.1	4.41	1.5435
0.4	13	5.2	2.9	8.41	3.364
0.15	20	3	9.9	98.01	14.7015
Mean	10.1	Variance	56.09

Mean = 10.1%

Standard Deviation = Variance ^0.5 = 56.09^0.50 = 7.49 %

Financial Asset B :

Possibility (P)	Return (y)	Py	y - mean of y	(y - mean)^2	P*(y - mean)^2
0.1	1	0.1	-7.1	50.41	5.041
0.35	5	1.75	-3.1	9.61	3.3635
0.4	10	4	1.9	3.61	1.444
0.15	15	2.25	6.9	47.61	7.1415
Mean	8.1	Variance	16.99

Mean = 8.1%

Standard deviation = 16.99 ^0.5 = 4.12

Financial Asset C :

Possibility (P)	Return (z)	Pz	z - mean of z	(z - mean)^2	P*(z - mean)^2
0.1	-20	-2	-35.75	1278.0625	127.8063
0.35	-10	-3.5	-25.75	663.0625	232.0719
0.4	25	10	9.25	85.5625	34.2250
0.15	75	11.25	59.25	3510.5625	526.5844
Mean	15.75	Variance	920.6875

Mean = 15.75

Standard deviation = 920.69^0.5 = 30.24%

Coefficient of variation = standard deviation / mean

COV for A = 7.49 / 10.1 = 0.74

COV FOR B = 8.1/ 4.12 = 0.51

COV FOR C = 30.34 / 15.75 = 1.93

Financial asset will be preferred as per the COV as it has lowest COV.