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Financial Management
Notes Asset A
Standard Deviation 1.160 = 1.077
Asset B
Standard Deviation 42.25 = 6.5
Standard Deviation
Coefficient of Variation of Returns of Asset A =
Expected Returns
1.077
= = 0.73
14.8
6.5
Coefficient of variation of return of Asset B = = 0.42
15.5
The higher the coefficient of variation, the more risky the asset returns are. Returns of Asset B is
therefore more risky than returns of Asset A.
Self Assessment
Fill in the blanks:
4. Sensitivity analysis and ………………………can be used to assess the general level of risk
associated with a single asset.
5. A ……………………..is a model that relates probabilities to the associated outcomes.
6. The …………………...is a measure of relative dispension that is useful in comparing the
risk of assets with differing expected returns.
5.3 Portfolio Theory and Risk Diversification
The portfolio theory provides a normative approach to investor’s decision to invest in assets or
securities under risk. It is based on the assumption that investors are risk averse. This implies
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