Answer (C) is correct . The coefficient of variation is useful when the rates of return and standard deviations of two investments differ. It measures the risk per unit of return by dividing the standard deviation by the expected return. Thus, for Project 1, dividing $200,000 by $120,000 produces a coefficient of 1.67. For Project 2, the calculation is to divide $150,000 by $100,000, or 1.50. If the two projects had perfect correlation (=1.0), then you could combine the calculations ($350,000 ¡Â $220,000 = 1.59). However, with a correlation of less than one, the risk will be something less than 1.59.Answer (A) is incorrect because This figure is for Project 1 only.
Answer (B) is incorrect because This figure assumes a correlation of 1.0.
Answer (D) is incorrect because This figure is the inverse of the unadjusted portfolio coefficient.
|
