Answered: Coefficient of variation of Which…

Coefficient of variation of Which project has a lower absoute risk level which project project would you advise the firm to choose? Explain your answers h a lower relative rik level which

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 4P

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Concept explainers

Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.

Question

A firm has two potential investment projects. The project information is summarised in the tale below
Project A
$670
175
0.26
Project B
$700
Expected value of profit
Standard deviation of profit
Coefficient of variation of profit
370
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

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