Coefficient of variation Metal Manufacturing has isolated four alternatives for meeting its need for

QUESTION

Coefficient of variation Metal Manufacturing has isolated four alternatives for meeting its need for increased production capacity. The following table summarizes data gathered relative to each of these alternatives.ExpectedStandard deviationAlternativereturnof returnA20%7.0%B229.5C196.0D165.5a. Calculate the coefficient of variation for each alternative.b. If the firm wishes to minimize risk, which alternative do you recommend? Why?
Concept: Coefficient of variation can be calculated as: Coefficient of variation (CV) = Standard Deviation/Expected Return Solution: Alternative Expected Return Standard Deviation Coefficient of variation A 20% 7.0% 7%/20% = 0.35 B 22 9.5 9.5%/22% = 0.43 C 19 6.0 6%/19% = 0.32 D 16 5.5 5.5%/16% = 0.34 (b) Coefficient of variation is

used to measure the risk. Lower coefficient of variation shows the low risk or high return for the firm. Here, alternative C has lowest coefficient of variation. Therefore, alternative C is recommended to minimize the risk.

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