A Stock Has an Expected Return of 12 Percent and a Standard

question 6

Multiple Choice

A stock has an expected return of 12 percent and a standard deviation of 25 percent.Long-term Treasury bonds have an expected return of 5 percent and a standard deviation of 9 percent.Given this data,which of the following statements is correct?

• A) The two assets have the same coefficient of variation.
• B) The stock investment has a better risk-return trade-off.
• C) The bond investment has a better risk-return trade-off.
• D) Both investments have the same diversifiable risk.

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Definitions:

Marginal Rate Of Substitution

The pace at which a consumer opts to swap one item for another, ensuring their overall happiness remains unchanged.

Marginal Product

The additional output that an additional unit of input (such as labor or capital) will produce, holding all other inputs constant.

Returns To Scale

The change in output resulting from a proportional change in all input factors where all inputs are increased or decreased by the same factor.

Marginal Products

This refers to the additional output that results from using an extra unit of a particular input, assuming other inputs are constant in the production process.