Question

Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway Train Co. is more typical of the average corporation and is risk-averse.

Returns:
Projects Expected Value Standard Deviation
A $ 298,000 $ 210,000
B 704,000 454,000
C 164,000 133,000
D 196,000 252,000
a-1. Compute the coefficients of variation.
a-2. Which projects should Mountain Ski Corp. choose?
b. Which one of the four projects should Lakeway Train Co. choose based on the same criteria of using the coefficient of variation?

Answer 1

a-1)

- Project A = 0.70

- Project B = 0.64

- Project C = 0.81

- Project D = 1.29

a-2) Mountain Ski Corp. should choose projects D and C

b) Lakeway Train Co. should choose project B

Step-by-step explanation:

It’s needed to calculate the coefficient of variation for each project

Formula: CV=σ/μ

Where:

σ = standard deviation

μ = mean

The coefficient of variation (CV) is a ratio that compares the standard deviation with the mean of a project`s return, indicating the volatility and risk of it. The lower its value the better risk-return trade-off. So, a company set up to take large risks such as Mountain Ski Corp. would choose projects with high CV (Projects D and C), and a risk-averse company such as Lakeway Train Co. would choose projects with low CV (Project B).