Question

QUESTION 1

RG Bhd has excess funds in hand. Their management is deciding to invest in one of the two mutually exclusive projects namely, Artery and Thumb. Available information is as the following

State of Economy	Probability	Expected Return (%)
		Artery	Thumb
Boom	0.20	70	90
Stable	0.50	30	50
Recession	0.20	20	(10)

1. Calculate the expected return, standard deviation and the coefficient of variation for both projects.
2. Considering the risk factor, which investment should the company choose and why?              

Answer 1

Expected returns
Artery=0.20*70%+0.50*30%+0.20*20%=33.0000%

Thumb=0.20*90%+0.50*50%+0.20*(-10%)=41.0000%

Standard deviation
Artery=sqrt(0.20*(70%-33.0000%)^2+0.50*(30%-33.0000%)^2+0.20*(20%-33.0000%)^2)=17.6664%

Thumb=sqrt(0.20*(90%-41.0000%)^2+0.50*(50%-41.0000%)^2+0.20*(-10%-41.0000%)^2)=32.2630%

Coefficient of variation
Artery=17.6664%/33.0000%=0.5353

Thumb=32.2630%/41.0000%=0.7869

Choose Artery as it has lower coefficient of variation and lower coefficient of variation means lower risk