Question

Possible outcomes for three investment alternatives and their probabilities of occurrence are given next.       
  

	Alternative 1							Alternative 2							Alternative 3
	Outcomes			Probability				Outcomes			Probability				Outcomes			Probability
Failure		50			.2				90			.3				95			.2
Acceptable		90			.4				190			.3				215			.6
Successful		135			.4				225			.4				380			.2

  
Using the coefficient of variation, rank the three alternatives in terms of risk from lowest to highest. (Do not round intermediate calculations. Round your answers to 3 decimal places.)
  

Answer 1

Alternative-1
Mean return expected=50*0.2+90*0.4+135*0.4	100.00
Variance=0.2*(50-100)^2+0.4*(90-100)^2+0.4*(135-100)^2	1030.00
Standard Deviation=Square Root of Variance=(1030)^(1/2)	32.09
coefficient of variation=32.09/100	0.32
Alternative-2
Mean return expected=90*0.3+0.3*190+0.4*225	174.00
Variance=0.3*(90-174)^2+0.3*(190-174)^2+0.4*(225-174)^2	3234.00
Standard Deviation=Square Root of Variance=(3234)^(1/2)	56.87
Coefficient of variation=56.87/174	0.33
Alternative-3
Mean return expected=0.2*95+0.6*215+0.2*380	224.00
Variance=0.2*(95-224)^2+0.6*(215-224)^2+0.2*(380-224)^2	8244.00
Standard Deviation=Square Root of Variance=(8244)^(1/2)	91
Coefficient of variation=91/224	0.41
Ranks are as follows:
Alternative-1 : rank 1
Alternative-2 : rank 2
Alternative-3 : rank 3