Suppose you wish to invest money safely and are trying to decide between stock options in two companies. The average rates of return are the same for both companies but, one company has a much larger standard deviation of its rates of return. A. Which company should you invest in?

Standard deviation is when individual data points differ from the mean by a measure of the average amount. The smaller the standard deviation, the less risky an investment will be.

Accounting Rate of Return is the ratio of the average net income

to the average capital cost.

In this case both companies have the same average rate of return but one has a higher standard deviation to rate of return. Since both companies have same average rate of return but one has a higher standard deviation, the one with the larger standard deviation poises more risk.

It is safer to invest in the company with a lower standard deviation considering the fact they have the same ARR.

andromache andromache · Answer 2 · 2021-12-30T12:35:03+01:00

I would invest in the company with a smaller standard deviation of it's return rate

The following information should be considered;

A smaller standard deviation means less deviation from the average return.
In the case when there is less deviation, there is less risk of large upside as well as less risk of downside.
Now If you are a risk averse investor then a large downside is what you want to avoid.
Hence, you will choose the stock with lesser standard deviation because it has less risk.

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