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.

Projects Returns: Expected Value Standard Deviation
A $ 310,000 $ 173,000
B 676,000 413,000
C 163,000 120,000
D 134,000 101,000
a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.)
a-2. Which of the following four projects should Mountain Ski Corp.
A. Project B
B. Project A
C. Project C
D. Project D

Answer 1

B. Project A

Step-by-step explanation:

Coefficient of variation=standard deviation/expected return value

Project A:

Coefficient of variation=$173,000/$310,000= 0.558

Project B:

Coefficient of variation=$413,000/$676,000= 0.611

Project C:

Coefficient of variation=$120,000/$163,000=0.736

Project D:

Coefficient of variation=$101,000/$134,000=0.754

The Project A has the lowest rate of risk per unit of return, hence, it is the preferred choice of investment