Few Questions about coefficient of variation and high risk returns?

Question

Stock A has an expected return of 10% and a standard deviation of 15%. Stock B has an expected return of 12% and a standard deviation of 17%.According to the coefficient of variation, which of the following stocks is riskier?

Rank the following types of securities from high risk/return to low risk/return based on their historical averages: large company stocks, long term corporate bonds, small company stocks, and U.S. Treasury bills.

Should a diversified investor be more concerned with systematic risk or unsystematic risk? Explain.

Answer 1

Coefficient of Variation = Standard Deviation ÷ Expected Return

The lower the ratio the better

Stock A = 15%÷10% = 1.5  

Stock B = 17%÷12% = 1.42

Therefore, Stock A is the riskier

From low risk to high risk:

1. US Treasury Bill

2. Long Term Corporate Bonds

3. Large Company Stocks

4. Small Company Stocks

A bondholder is a creditor of the company while a stockholder is a part owner.  By law, creditors are paid first before the owners in time of liquidation.

A diversified investor is more concerned with systematic risk.  He holds wide range of well diversified portfolio where the returns on such well diversified portfolio will vary due to the effects of market-wide or economy wide factors, thereby eliminating the unsystematic risk.