Syntex will invest in two stocks. The following is the
Stock A’s mean return is 10%, with a standard deviation of 15%.
Stock B’s average return is 8%, with a standard deviation of 66%.
Stock B is the most profitable investment. Stock B is a better investment than stock A. However, the expected return of stock B (8%) is less than stock A (8%). The risk involved with this stock (standard deviation = 6%) is also lower than stock A’s standard deviation ( 15%). Stock B offers investors a lower risk for any return level. With Stock B, there is less risk than Stock A, so investors have greater confidence for the expected returns.
Common Stock A Common Stock B
Probability Return Probability Return
0.20 10% 0.10 -7%
0.60 16% 0.40 5%
0.20 21% 0.40 13%
Based on the data in the table, how much is Stock A’s rate of return?