Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.

Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.

 

Investments	Returns: Expected Value			Standard Deviation
Buy stocks	$	9,470		$	6,120
Buy bonds		7,560			2,850
Buy commodity futures		20,400			26,100
Buy options		18,800			16,600

 

a-1.	Compute the coefficients of variation. (Round your answers to 3 decimal places.)

 

	Coefficient of Variation
Buy stocks
Buy bonds
Buy commodity futures
Buy options

 

a-2.	Which one of the following four investments should Tim choose?
	Buy bonds

 
 

b.	Which one of the four investments should Mike choose?
	Buy commodity futures

 
Explanation:

Coefficient of variation (V) = Standard deviation / Expected value

a-1.

Buy stocks	$6,120 / $9,470	=	.646
Buy bonds	$2,850 / $7,560	=	.377
Buy commodity futures	$26,100 / $20,400	=	1.279
Buy options	$16,600 / $18,800	=	.883

a-2.

Tim should buy the bonds because bonds have the lowest coefficient of variation.

b.

Mike should buy the commodity futures because they have the highest coefficient of variation.