Question

14-3 Five investment proje $1,400 vestment projects have the following expected net present value standard deviations of returns: roject Expected Net Present Value Standard Deviation $7,000 В 6,300 70,000 21,000 35,000 2,100 21,000 2,800 4,900 (a) Determine the coefficie from lowest risk to highest risk. on for these five projects and rank them (b) If you were to choose betw use the coefficient of variation? etween Projects C and E only, would you need to

everything is the same except rhat expected net present valie of A is $8,000, B is $60,000, C is 25,000, D is 30,000 and E is 23,000

Answer 1

Coefficient of Variation is the measure of the dispersion of data points. It basically is represented by the ratio of the standard deviation to the mean.

Coefficient of Variation = Standard Deviation/Mean Return (in this case expected Net Present Value)

a.

Project	Expected NPV	Standard Deviation	Formula	Coefficient of Variation
E	23000	2100	2100/23000	0.0913
D	30000	2900	2900/30000	0.0967
B	60000	6300	6300/60000	0.1050
C	25000	2800	2800/25000	0.1120
A	8000	1400	1400/8000	0.1750

b.

The coefficient of variation gives us the risk to reward ratio that is the risk one is taking for the reward one is getting. Project C gives higher reward but is much more risky, whereas project E has lower rewards but is the least risky. Coefficient of Variation is definitely helpful in this situation but is not the sole criteria for taking a call.