Standard deviation versus coefficient of variation as measures of risk Greengage Inc., a successful nursery, is considering several expansion projects. All the alterna-tives promise to produce an acceptable return. Data on four possible projects follow. Project Expected return Range Standard deviationA 12.0% 4.0% 2.9% B 12.5 5.0 3.2 C 13.0 6.0 3.5 D 12.8 4.5 3.0 a. Which project is least risky, judging on the basis of range? b. Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purposes of this comparison.c. Calculate the coefficient of variation for each project. Which project do you think Greengage’s owners should choose? Explain why.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Standard deviation versus coefficient of variation as measures of risk Greengage Inc., a successful nursery, is considering several expansion projects. All the alterna-tives promise to produce an acceptable return. Data on four possible projects follow.
Project Expected return Range Standard deviation
A 12.0% 4.0% 2.9%
B 12.5 5.0 3.2
C 13.0 6.0 3.5
D 12.8 4.5 3.0
a. Which project is least risky, judging on the basis of range? b. Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purposes of this comparison.
c. Calculate the coefficient of variation for each project. Which project do you think Greengage’s owners should choose? Explain why.
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