Standard deviation versus coefficient of variation as measures of risk Greengage, Inc., a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects appear in the following table: Project Expected return Range Standard deviation A 12.6% 5.7% 2.6% B 11.6% 6.2% 3.9% C 11.9% 5.9% 3.6% D 11.8% 6.1% 3.3% a. Which project is least risky, based on the range of possible outcomes? b. Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purpo

Standard deviation versus coefficient of variation as measures of risk Greengage, Inc., a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects appear in the following table: Project Expected return Range Standard deviation A 12.6% 5.7% 2.6% B 11.6% 6.2% 3.9% C 11.9% 5.9% 3.6% D 11.8% 6.1% 3.3% a. Which project is least risky, based on the range of possible outcomes? b. Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purpo

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 3EP

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Standard deviation versus coefficient of variation as measures of risk Greengage Inc., a successful nursery, is considering several expansion projects. All the alterna-tives promise to produce an acceptable return. Data on four possible projects follow. Project Expected return Range Standard deviationA 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 a. Which project is least risky, judging on the basis of range? b. Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purposes of this comparison.c. Calculate the coefficient of variation for each project. Which project do you think Greengage’s owners should choose? Explain why.
The Ajax Company uses a portfolio approach to manage their research and development (RD) projects. Ajax wants to keep a mix of projects to balance the expected return and risk profiles of their RD activities. Consider a situation in which Ajax has six RD projects as characterized in the table. Each project is given an expected rate of return and a risk assessment, which is a value between 1 and 10, where 1 is the least risky and 10 is the most risky. Ajax would like to visualize their current RD projects to keep track of the overall risk and return of their RD portfolio. a. Create a bubble chart in which the expected rate of return is along the horizontal axis, the risk estimate is on the vertical axis, and the size of the bubbles represents the amount of capital invested. Format this chart for best presentation by adding axis labels and labeling each bubble with the project number. b. The efficient frontier of RD projects represents the set of projects that have the highest expected rate of return for a given level of risk. In other words, any project that has a smaller expected rate of return for an equivalent, or higher, risk estimate cannot be on the efficient frontier. From the bubble chart in part a, which projects appear to be located on the efficient frontier?
You are evaluating the following four projects: Project Beta Projected (or Expected) Return A 1.80 19.5% B 1.20 14.0% C 0.80 11.5% D 0.50 7.0% Your company’s current practice is to apply its WACC of 12% as a single hurdle rate to all projects. Under your company’s current practice, which project(s) of the four projects above would be incorrectly accepted? Currently, the 3-month Treasury bill rate is 3%, and the market risk premium is 10%. (Hint: Measure the RADRs using the CAPM.) Group of answer choices C A D B At least two of the projects are incorrectly accepted.
Risk analysis Green Energy is considering expanding its investment in renewable energy generation. Two possible types, wind and solar, of energy generation are under review. After investigating the possible outcomes, the company made the estimates shown in the following table: . The pessimistic and optimistic outcomes occur with a probablity of 25%, and the most likely outcome occurs with a probability of 50%. a. Determine the range of the rates of return for each of the two projects. b. Which project is less risky? c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? d. Assume that solar farm's most likely outcome is 18% per year and that all other facts remain the same. Does this change your answer to part c? is less risky because it has a range for the rate of return. c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? (Select the…
Suppose the net present values of projects A and B show a distribution as follows. Net Present Value (TL) 750 1000 1250 1500 1750 Project A 0.1 0.15 0.2 0.25 0.3 Project B 0.15 0.25 0.3 0.1 0.2 a) Compare the projects according to the expected value criteria? b) Compare the projects by standard deviation criteria? c) Evaluate A and B projects according to the coefficient of variation criteria?
Mike Riskless is considering two projects. He has estimated the IRR for each under three possible scenarios and assigned probabilities of occurrence to each scenario. State of Economy Probability Estimated BTIRR Investment I Estimated BTIRR Investment II Optimistic 0.20 0.15 0.20 Most likely 0.60 0.10 0.15 Pessimistic 0.20 0.05 0.05 1.00 Riskless is aware that the pattern of returns for Investment II looks very attractive relative to Investment I; however, he believes that Investment II could be more risky than Investment I. He would like to compare the two investments considering both the risk and return on each. Required: a. Compute BTIRR under each of the three possible scenarios. b. Compute variance and standard deviation of the IRRs.
Midland is a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects follow. Project Expected return Range Standard deviation 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 Which project is least risky, judging on the basis of range? Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purposes of this comparison. Calculate the coefficient of variation for each project. Which project do you think Greengage’s owners should choose? Explain why.
Carter Company is considering three investment opportunities with the following accounting rates of return: Project Y Project X 13.25% Project Z 10.47% ARR 6.58% Use the decision rule for ARR to rank the projects from most desirable to least desirable. Carter Company's required rate of return is 8%. (1 = most desriable and 3= least desirable. Select whether each project should be accepted or rejected.) C Rank Accept/Reject Project X Project Y Project Z @ # * $ IOL 4 % 2 6 4 & 7 4 8 ( 9 ➤W O
A firm has two potential investment projects. The project information is summarised in the table below. Project A $670 Project B $700 Expected value of profit Standard deviation of profit Coefficient of variation of profit 175 370 0.26 0.53 Which project has a lower absolute risk level? Which project has a lower relative risk level? Which project would you advise the firm to choose? Explain your answers. ---- --- ---- ..- ---
8. Modified Internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR. Consider the following situation: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $400,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 -200,000 425,000 475,000
points) possible S Carter Company is considering three investment opportunities with the following accounting rates of return: Project X Project Y Project Z ARR 13.25% 6.58% 10,47% Use the decision rule for ARR to rank the projects from most desirable to least desirable. Carter Company's required rate of return is 8%. (1 = most desriable and 3 = least desirable. Select whether each should be accepted or rejected.) Project Rank Accept/Reject 4 deler "k I % 1 2 3 4 5 6 QWERT A trl Project X Project Y Project Z caps lock shift t fn اب 2 @ Z # S $ alt الالالا C V G & Y B hp 7 H N 8 144 ( 9 ا۔ K M U O O P > ie alt ? 7 4 J backspace pause ctri <
You are evaluating the following four projects: Project A B C D Beta 1.80 1.20 1.00 0.50 O.B OC OD OA O At least two of the projects are incorrectly rejected. Projected (or Expected) Return ( 18.0% 16.8% 11.5% 9.5% Your company's current practice is to apply its WACC of 12% as a single hurdle rate to all projects. Under your company's current practice, which project(s) of the four projects above would be incorrectly.rejected? Currently, the 3-month Treasury bill rate is 3%, and the market risk premium is 10%. (Hint: Measure the RADRs using the CAPM.)