Question

In: Finance

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

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.)

Solutions

Expert Solution

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.


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