The Expected Returns for Stocks A, B, C, D, and E

question 41

Multiple Choice

The expected returns for Stocks A, B, C, D, and E are 7 percent, 10 percent, 12 percent, 25 percent, and 18 percent, respectively. The corresponding standard deviations for these stocks are 12 percent, 18 percent, 15 percent, 23 percent, and 15 percent, respectively. Which one of the securities should a risk-averse investor purchase if the investment will be held in isolation (by itself) ?

• A)A
• B)B
• C)C
• D)D
• E)E

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Definitions:

Revenue Variance

The variance between projected revenue and the actual income received.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance.

Variable Costs

Costs that vary directly with the level of production or sales volume, such as raw materials and direct labor.

Net Operating Income

The profit generated from a company's everyday business operations, calculated by subtracting operating expenses from the gross income.