Answer (B) is correct . The standard deviation (σ) of the returns on an investment is the square root of the total weighted squared variances of all its possible returns. The weighted squared variance of a stock’s expected returns is arrived at by first calculating the variance between each potential return and the expected rate of return for the stock. Marcel Company Stock Gilberte Company Stock Rate of Expected Rate of Expected Return Rate Variances Return Rate Variances ?6.0 % – 2.80% = ?3.20 % ?7.0 % – 2.75% = ?4.25 % ?4.0 % – 2.80% = ?1.20 % ?5.0 % – 2.75% = ?2.25 % ?2.0 % – 2.80% = (0.80)% ?0.0 % – 2.75% = (2.75)% (2.0)% – 2.80% = (4.80)% (1.0)% – 2.75% = (3.75)%
Answer (A) is incorrect because Marcel is the less risky of the two.
Answer (C) is incorrect because The two stocks are not equally risky.
Answer (D) is incorrect because The relative riskiness of investments can be determined from the standard deviation (σ).
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Based on a standard deviation (σ) calculation, which stock is riskier? (The expected rate of return of Marcel Company stock is 8.0% and that of Gilberte Company stock is 7.5%.)