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Chapter 4: Q7BP (page 440)

Five investment alternatives have the following returns and standard deviations of returns:

Alternatives

Returns:

Expected Value

Standard Deviation

A ....................... \( 5,000 \)1,200

B ....................... 4,000 600

C ....................... 4,000 800

D ....................... 8,000 3,200

E ....................... 10,000 900

Using the coefficient of variation, rank the five alternatives from the lowest risk to the highest risk

Short Answer

Expert verified
Table showing the Ranks

Coefficient of variation

Rank

Alternative A

0.24

Rank 5

Alternative B

0.15

Rank 4

Alternative C

0.2

Rank 2

Alternative D

0.4

Rank 3

Alternative E

0.09

Rank 1

Step by step solution

01

Computation of coefficient of variation

CoefficientofvariationAlternativeA=StandarddeviationExpectedvalue=12005,000=0.24

02

Computation of coefficient of variation

CoefficientofvariationAlternativeB=StandarddeviationExpectedsales=6004,000=0.15

03

Computation of coefficient of variation

CoefficientofvariationAlternativeC=StandarddeviationExpectedsales=8004,000=0.2

04

Computation of coefficient of variation

CoefficientofvariationAlternativeD=StandarddeviationExpectedsales=32008,000=0.4

05

Computation of coefficient of variation

CoefficientofvariationAlternativeE=StandarddeviationExpectedsales=90010,000=0.09

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Most popular questions from this chapter

Question:Surgical Supplies Corporation paid a dividend of $1.12 per share over the last 12 months. The dividend is expected to grow at a rate of 2.5 percent over the next three years (supernormal growth). It will then grow at a normal, constant rate of 7 percent for the foreseeable future. The required rate of return is 12 percent (this will also serve as the discount rate).

a. Compute the anticipated value of the dividends for the next three years (D1, D2, and D3).

b. Discount each of these dividends back to the present at a discount rate of 12 percent and then sum them.

c. Compute the price of the stock at the end of the third year (P3).

P3 = D4/ (Ke - g)

d. After you have computed P3, discount it back to the present at a discount rate of 12 percent for three years.

e. Add together the answers in part b and part d to get the current value of the stock. (This answer represents the present value of the first three periods of dividends plus the present value of the price of the stock after three periods.)

If you invest $9,000 today, how much will you have

d. In 25 years at 14 percent (compounded semiannually)?

Question: Franklin Templeton has just invested \(9,260 for his son (age one). This money will be used for his son鈥檚 education 18 years from now. He calculates that he will need \)71,231 by the time the boy goes to school. What rate of return will Mr. Templeton need in order to achieve this goal?

Why does money have a time value?

How is the supernormal growth pattern likely to vary from the normal, constant growth pattern?
See all solutions

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