Ch 13 dq

1. If corporate managers are risk-averse, does this mean they will not take risks? Explain.
Risk averse corporate managers are not unwilling to take risks, but will require a higher return from risky investments. There must be a premium or additional compensation for risk taking.

3. When is the coefficient of variation a better measure of risk than the standard deviation?
The standard deviation is an absolute measure of dispersion while the coefficient of variation is a relative measure and allows us to relate the standard deviation to the mean. The coefficient of variation is a better measure of dispersion when we wish to consider the relative size of the standard deviation or compare two or more investments of a different size.

4. Explain how the concept of risk can be incorporated into the capital budgeting process?
Risk may be introduced into the capital budgeting process by requiring higher returns for risky investments. One method of achieving this is to use higher discount rates for riskier investments. This risk adjusted discount rate approach specifies difference discount rates for different risk categories as measured by the coefficient of variation or some other factor. Other methods, such as the certainty equivalent approach, also may be used.

5. if risk is to be analyzed in a qualitative way, place the following investment decisions in order from the lowest risk to the highest risk: a. new equipment (2) b. new market (5) c. repair of old machinery (1) d. new product in a foreign market (6) e. new product in a related market (4) f. addition to a new product line (3)

6. assume a company, correlated with the economy, is evaluating six projects, of which two are positively correlated with the economy, two are negatively correlated, and two are not related with it at all.