Question

Assume you are risk-averse and have the following three choices. Expected Value Standard Deviation A $ 1,870 $ 1,520 B 2,000 840 C 1,590 710 a. Compute the coefficient of variation for each. (Round your answers to 3 decimal places.) b. Which project will you select

Answer 1

Answer:

a. The Coefficient of variation is expressed as;

= Standard Deviation/Expected return

Choice A

= 1,520/1,870

= 0.813

Choice B

= 840/2,000

= 0.42

Choice C

= 710/1,590

= 0.447

b. The coefficient of variation measures the volatility of the return of the investment. The more volatile it is, the more risky it is. A risk Averse investor would go for the one with the least Coefficient which is Choice B in this case.