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The Role of Risk in Capital Budgeting > Assessing Stand-Alone Risk
Assessing Stand-Alone Risk
• Overview of How to Assess Stand-Alone Risk
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The Role of Risk in Capital Budgeting > Assessing Stand-Alone Risk
Overview of How to Assess Stand-Alone Risk
• Appraisers frequently value assets or investments, such as closely held
corporations, as stand-alone assets.
• In terms of finance, the coefficient of variation allows investors to determine how
much volatility (risk) they are assuming in relation to the amount of expected
return from an investment.
• A lower coefficient of variation indicates a higher expected return with less risk.
Coefficient of Variation
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Appendix
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The Role of Risk in Capital Budgeting
Key terms
• correlation coefficient Any of the several measures indicating the strength and direction of a linear relationship between two
random variables.
• probability distribution A function of a discrete random variable yielding the probability that the variable will have a given value
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The Role of Risk in Capital Budgeting
Coefficient of Variation
The coefficient of variation, an example of which is plotted in this graph, can be used to measure the ratio of volatility to expected return.
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Wikimedia. "Diagram of coefficient of variation versus deviation in reference ranges erroneously not established by log-normal distribution." CC BY
http://commons.wikimedia.org/wiki/File%253ADiagram_of_coefficient_of_variation_versus_deviation_in_reference_ranges_erroneously_not_established_by_log-
The Role of Risk in Capital Budgeting
Which of the following does NOT measure an investment's standalone risk?
A) Total Beta.
B) The coefficient of variation.
C) The correlation coefficient.
D) The portfolio's beta divided by the correlation coefficient.
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The Role of Risk in Capital Budgeting
Which of the following does NOT measure an investment's standalone risk?
A) Total Beta.
B) The coefficient of variation.
C) The correlation coefficient.
D) The portfolio's beta divided by the correlation coefficient.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
The Role of Risk in Capital Budgeting
Attribution
• Wikipedia. "Coefficient of variation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Coefficient_of_variation
• Wikipedia. "Beta (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Beta_(finance)
• Wiktionary. "probability distribution." CC BY-SA 3.0 http://en.wiktionary.org/wiki/probability+distribution
• Wiktionary. "correlation coefficient." CC BY-SA 3.0 http://en.wiktionary.org/wiki/correlation+coefficient
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