Principles of Managerial Finance

LG2

LG2

CHAPTER 5 Risk and Return 251

Use the table to:

a. Construct a bar chart for each line’s annual rate of return.

b. Calculate the expected valueof return for each line.

c. Evaluate the relative riskiness for each jean line’s rate of return using the bar

charts.

5–7 Coefficient of variation Metal Manufacturing has isolated four alternatives for

meeting its need for increased production capacity. The data gathered relative to

each of these alternatives is summarized in the following table.

a. Calculate the coefficient of variationfor each alternative.

b. If the firm wishes to minimize risk, which alternative do you recommend?

Why?

5–8 Standard deviation versus coefficient of variation as measures of risk Greengage,

Inc., a successful nursery, is considering several expansion projects. All of the

alternatives promise to produce an acceptable return. The owners are extremely

risk-averse; therefore, they will choose the least risky of the alternatives. Data on

four possible projects follow.

Project Expected return Range Standard deviation

A 12.0% .040 .029

B 12.5 .050 .032

C 13.0 .060 .035

D 12.8 .045 .030

Expected Standard

Alternative return deviation of return

A 20% 7.0%

B22 9.5

C19 6.0

D16 5.5

Annual rate of return

Market acceptance Probability Line J Line K

Very poor .05 .0075 .010

Poor .15 .0125 .025

Average .60 .0850 .080

Good .15 .1475 .135

Excellent .05 .1625 .150