The profits from two projects have different mean values and standard deviations. The project is relatively less risky if its profits have aa.higher standard deviation.b.higher expected value.c.higher coefficient of variationd.lower coefficient of variation.
Question
The profits from two projects have different mean values and standard deviations. The project is relatively less risky if its profits have aa.higher standard deviation.b.higher expected value.c.higher coefficient of variationd.lower coefficient of variation.
Solution
The project is relatively less risky if its profits have a lower coefficient of variation.
Here's why:
The coefficient of variation (CV) is a statistical measure of the relative variability or dispersion of data points in a data series around the mean. In finance, the coefficient of variation allows investors to determine how much volatility, or risk, is assumed in comparison to the amount of return expected from investments.
The lower the coefficient of variation, the less dispersion there is. In other words, the profits are more reliably close to the mean. Therefore, a lower CV indicates less risk.
On the other hand, a higher CV indicates a higher risk, as the profits are more spread out from the mean.
So, in the context of risk, you would prefer a project with a lower coefficient of variation.
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