Champion Breweries must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis
For each asset, compute
(a) the expected rate of return.
(b) the standard deviation of the expected return.
(c) the coefficient of variation of the return.
(d) Which asset should Champion select?
(a)
Expected Return = 15% Expected Return = 15%
(b) Asset A
× 0.30 = 7.5%
× 0.40 = 0%
× 0.30 = 7.5%
15%
Variance = 15
Standard Deviation of A = 3.87%
Asset B
× 0.40 = 40%
× 0.20 = 0%
× 0.40 = 40%
80%
Standard Deviation of B = 8.94%
(c) CVA = 3.87/15 = 0.26 CVB = 8.94/15 = 0.60
(d) Asset A; for 15% rate of return and lesser risk.
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