Five investment alternatives have the following returns and standard deviations of returns Alternative Returns: Standard Expected value Deviation ABCDE 4.000 600 4,000 8.000 3,200 10.000 900 Using the coefficient of variation, rank the five altematives from lowest risk to highest risk Solution: Coefficient of variation (V)=standard deviation/mean return Ranking from lowest to highest A$1,200$5,000=24 E(.09) B$600/$4.000=.15 B(15) C$800/$4,000=20 C(20) D$3,200/$8,000=40 A(24) E$900/$10.000=.09 D(40 13-6 In problem 5, if you were to choose between Alternative B and C only, would you need to use the coefficient of variation? why? Solu Since b and c have the same expected value they can be evaluated based on their standard de ofreturn C has a I deviation and so is riskier than b for the same expected return S-485 by The MCopyright © 2005 by The McGraw-Hill Companies, Inc. S-485 13-5. Five investment alternatives have the following returns and standard deviations of returns. Alternative Returns: Expected Value Standard Deviation A................. $ 5,000 .............. $1,200 B................. 4,000 .............. 600 C................. 4,000 .............. 800 D................. 8,000 .............. 3,200 E ................. 10,000 .............. 900 Using the coefficient of variation, rank the five alternatives from lowest risk to highest risk. Solution: Coefficient of variation (V) = standard deviation/mean return Ranking from lowest to highest A $1,200/$5,000 = .24 E (.09) B $600/$4,000 = .15 B (.15) C $800/$4,000 = .20 C (.20) D E $3,200/$8,000 = .40 $900/$10,000 = .09 A (.24) D (.40) 13-6. In problem 5, if you were to choose between Alternative B and C only, would you need to use the coefficient of variation? Why? Solution: Since B and C have the same expected value, they can be evaluated based on their standard deviations of return. C has a larger standard deviation and so is riskier than B for the same expected return