Question

Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 10 percent and standard deviation of 27 percent. The average return and standard deviation of WholeMart are 11 percent and 30 percent; and of Fruit Fly are 16 percent and 20 percent.

Answer 1

Solution :

We shall use the co-efficient of variation to measure the risk level of the three stocks.

The coefficient of variation is a measure of risk per unit of return or reward.

The formula for calculating the coefficient of variation is

= Standard Deviation / Average Return

Thus the

a. Coefficient of variation for Night Ryder

As per the Information given in the question we have

Average Return = 10 % and Standard Deviation = 27 %

Applying the above values in the formula we have :

= 27 / 10 = 2.70

Coefficient of variation of Night Ryder = 2.70

b. Coefficient of variation for Whole Mart :

As per the Information given in the question we have

Average Return = 11 % and Standard Deviation = 30 %

Applying the above values in the formula we have :

= 30 / 11 = 2.73

Coefficient of variation of Whole Mart = 2.73

c. Coefficient of variation for Fruit Fly :

As per the Information given in the question we have

Average Return = 16 % and Standard Deviation = 20 %

Applying the above values in the formula we have :

= 20 / 16 = 1.25

Coefficient of variation of Fruit Fly = 1.25

Thus based on the risk levels of the stock as per their Coefficient of Variation, they can be ranked as follows :

( Highest to lowest )

Rank 1 : Whole Mart = 2.73

Rank 2 : Night Ryder = 2.70

Rank 3 : Fruit Fly = 1.25