Problem:
Greengage, a successful nursery, is considering several expansion projects. All of the alternatives promise to produce an acceptable return. The owners are extremely risk-adverse, they will choose the least risky of the alternatives. Data on the four possible projects is illustrated below.
|
Expected |
|
Standard |
| Project |
return |
Range |
deviation of return |
| 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% |
Q1. Which project is least risky, judging on the basis of range?
Q2. Which project has the lowest standard of deviation? Explain why standard deviation is not an appropriate measure of risk for purposes of this comparison.
Q3. Calculate the coefficient of variation for each project. Which project will Greengage's owners choose? Explain why this may be the best measure of risk for comparing this set of opportunities.