FIN 475 Spring 2014
Cases in Financial Management
Case 2
Prepared For Dr. Haskins
By Kaylynn Burgess, Cody Jochim, and Richard Caldecott
February 20, 2014

1. The case gave a table that had the rate or return under certain conditions and from that we found the expected returns, standard deviations, and coefficients of variations for the assets. For the expected returns we took the probability and multiplied that by the rate of return for each type of economy, and then added them all up. To get standard deviation you must first calculate the variance. For that we took the rate of return minus expected return, squared that difference, multiplied that by the probability, and then summed them up. The get the standard deviation we took the square root of the variance. To get the coefficient of variations we took the standard deviation and divided it by the expected return. | T-Bills | Market | Games Inc. | Outplace Inc. | Expected Return | 6% | 10% | 13% | 12% | Standard Deviation | .03824 | .0875 | .2259 | .1308 | CV | .6374 | .8746 | 1.7374 | 1.0897 |
We ranked the assets from least risky to most risky by their standard deviation and coefficient of variation and the ranks were the same. The T-Bills were the least risky followed by the market, Outplace Inc., and then Games Inc. In the investing world, the coefficient of variation allows you to determine how much risk you are assuming in comparison to the amount of return you can expect from your investment. The coefficient of variation is useful because the standard deviation of data must always be understood in the context of the mean of the data. In contrast, the actual value of the CV is independent of the unit in which the measurement has been taken, so it is a dimensionless number. For comparison between data sets with different units or widely different means, one should use the