The retailer has the option to invest in either venture A or venture B. Both ventures require an investment of f40,000. The net expected values and standard deviations for the two ventures are stated in Table 4 below.

Table 4 - Outcomes

Venture A   Net EV = $48.0 Standard Deviation = $31.08

Venture B   Net EV = f42.2 Standard Deviation = 14.32

Required for Task 6 (Comments for task 6 should not exceed 50 words in total.)

1. Calculate the coefficients of variation for venture A and venture B.

2. Assuming the retailer is risk averse, which project should be chosen?

Answer:

a)

CV of Project A = 0.6475

CV of Project B = 0.3393

b) As Project B has lower coefficient of variation, Project B will be chosen

Step-by-step explanation

Coefficient of Variation CV = SD/EV

CV of Project A = SD of A/Net EV of A

= 31.08/48 = 0.6475

CV of Project B = SD of B/Net EV of B

= 14.32/42.2 = 0.3393

Coefficient of variation shows addition risk need per unit change in expected value.

For project A, for every additional unit of expected value, 0.6475 units of risk needs to be taken.

For project A, for every additional unit of expected value, 0.3393 units of risk needs to be taken.

As the additional risk involved per unit of return is lower in Project B, Project B will be chosen by retailer who is risk averse.

Reference Link:

https://www.investopedia.com/terms/c/coefficientofvariation.asp