QUESTION 2:

A. Fair, Inc. is considering an investment in one of two common stocks. Given the information

that follows, which investment is better, based on risk (as measured by the standard deviation)

and return?

Stock A Stock B

Probability Return Probability Return

Stock A stock B

.30 12% .20 15%

.40 16% .30 6%

.30 18% .30 13%

.20 21%

B.Understanding the relationship between risk and return and how it's affected by time is

probably one of the most important aspects of investment' - Discuss.

i. Different types of risk

ii. Diversification reduces risk

iii. Common measures of risk