[k1zuna]

39. CPA-

An accountant has been retained by a company as an investment advisor for its employees. Research of historical rates of return yields the following information:

Type of Investment Mean Return Standard Deviation

Common stocks 12% 20%

Long-term corporate bonds 6% 8%

Intermediate-term government bonds 5% 5%

U.S. Treasury bills 4% 3%

Which of the following investments has the greatest reward/risk ratio if a return’s standard deviation is an accurate assessment of investment risk?

a. Common stocks.

b. Long-term corporate bonds.

c. Intermediate-term government bonds.

d. U.S. Treasury bills. (correct)

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I’m tired of seeing questions not covered by becker…. URGH.

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[J]

Answer should be A – Common Stock. The “reward” consideration is obviously the return; in this question, common stock has an average return of 12%, which is significantly above the other possible investments (this is historically true as well; common stock averages a bit better than 8% annually). The risk deals with the variation (in this case represented by the standard deviation) of return. Most of these situations infer a normal distribution (perfectly shaped bell curve with equal distributions to the left or the right of the mean).

Therefore with a mean (or average) return of 12% but a higher standard deviation, this means that your return could be significantly higher than the mean but could also be significantly lower (hence a greater risk). In this problem, I believe that the standard deviation in percentage form refers to the percentage deviation away from the mean. Hence, if you take 12% * 0.2 (20%), this means that one standard deviation to the left or right of the mean would be +/- 2.4%… anywhere from 9.6% to 12.4%. If you recall the Empirical Rule in that approximately 68% of observations in a normal distribution fall within 1 standard deviation from the mean, approximately 95% fall within 2 standard deviations, and approximately 99.7% fall within 3 standard deviations… you can see that there is a much more significant risk involved here with respect to the other potential investments.

[so1913]

Great :/….

AUD - 90 Pass
REG - 70,61,81 Pass DONE DONE DOOOOONNEEE!!!!!!!!
BEC - 79 - Pass
FAR - 70,82 - Pass

[so1913]

Great :/….

AUD - 90 Pass
REG - 70,61,81 Pass DONE DONE DOOOOONNEEE!!!!!!!!
BEC - 79 - Pass
FAR - 70,82 - Pass

[k1zuna]

Thanks InterFC1. I'm just surprised that Becker doesn't even cover standard deviation…

According to Becker, the answer is D (no idea why). But your explanation makes much more sense.

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[J]

Looks like I missed the word “ratio” in that question… my explanation makes perfect sense if you're considering the overall risk/reward relationship; I think that what the question is asking is which investment gives you the greatest reward with the least amount of risk, which would be “D” in the sense that it offers you a better return (although lower than any of the other options) with lower risk. You don't even need my explanation for this one; you can just look at the given numbers and do a quick ratio for each to come up with “D”.

Regardless, this is a very minuscule topic in the grand scheme of things; you *might* see one question on something like that.

[Anonymous]

All the question is asking is of:

6/10

6/8

5/5

4/3

which is the biggest

[k1zuna]

thanks Darcer

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[Author]

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