Question

23) 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		80			0.40				90			0.20				100			0.30
Acceptable		80			0.20				185			0.20				220			0.50
Successful		155			0.40				220			0.60				375			0.20

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

Solution :

Investment Alternative 1 : Coefficient of Variation = 0.334 ; Ranking = 2

Investment Alternative 2 : Coefficient of Variation = 0.269 ; Ranking = 1

Investment Alternative 3 : Coefficient of Variation = 0.444 ; Ranking = 3

Note : The coefficient of variation is a measure of risk per unit of return or reward.

Thus lower the coefficient of variation lower the risk.

The formula for calculating the coefficient of variation is

= Standard Deviation / Mean

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.