Question: According to the annual report issued by Wilson & Associates, an investment firm in Bowling Green, the stocks in its Growth Fund have generated an average return of 8% with a standard deviation of 2%. The stocks in the Specialized Fund have generated an average return of 18% with a standard deviation of 6%.
a. Based on the data provided, which of these funds has exhibited greater relative variability? Use the proper statistical measure to make your determination.
b. Suppose an investor who is very risk averse is interested in one of these two funds. Based strictly on relative variability, which fund would you recommend? Discuss.
c. Suppose the distributions for the two stock funds had a bell-shaped distribution with the means and standard deviations previously indicated. Which fund appears to be the best investment, assuming future returns will mimic past returns? Explain.