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CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions

Two mutually exclusive projects have the following. Project X: expected NPV Rs 2,00,000, standard deviation Rs 1,00,000. Project Y: expected NPV Rs 3,00,000, standard deviation Rs 1,80,000. Which statement is correct on the coefficient of variation (CV)?

X has a coefficient of variation of 0.50 and Y has 0.60, so X is less risky per rupee of expected return. The coefficient of variation is the standard deviation divided by the expected NPV, giving 1,00,000 over 2,00,000 for X and 1,80,000 over 3,00,000 for Y.

  1. AX has CV 0.50 and is less risky per rupee of return than Y with CV 0.60Correct
  2. BX has CV 2.00 and Y has CV 1.67
  3. CBoth have the same CV
  4. DY has CV 0.60 and X has CV 0.67

Explanation

CV = standard deviation / expected NPV. X = 1,00,000/2,00,000 = 0.50; Y = 1,80,000/3,00,000 = 0.60. X has lower relative risk. Options inverting the ratio or misstating values are wrong.

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