The paper "Probability Problem and Question on Identifying Decision Models" is a perfect example of a finance and accounting assignment. Making investment decisions involves proper assessment of risks and return profiles of the existing portfolios. The relationship between the expected return and standard deviation for all the asset portfolios can be used to determine whether or not the portfolio(s) is(are) fit to warrant an investment decision. Even though the risk of investing in a single asset may seem high, such a risk may become substantially lower or zero when assets are combined or analyzed collectively.
Therefore, when analyzing different assets as a set of securities, it is always necessary to have good knowledge of how the assets relate to each other. While the expected return measures the amount of profit that the manager expects to generate from the assets, the standard deviation measures the risk associated with each asset. The larger the standard deviation, the higher the risk associated with that particular asset. However, where the expected return and standard deviation are different, it is always advisable for managers to consider making a tradeoff decision between the expected return and standard deviation.
Considering the table above, the financial manager should consider selecting asset B because it has the lowest coefficient of variation. The lower standard deviation means that the risk of investing in asset B is lower compared to the risk of investing in all the other three assets. Similarly, the lowest coefficient of variation means that asset B is less volatile compared to assets M, Q, and D. Calculations: For asset B, the coefficient of variation is equal to = 50% For asset M, the coefficient of variation is equal to = 62.5% For asset Q, the coefficient of variation is equal to = 64.3% For asset D, the coefficient of variation is equal to = 66.7% Which asset would the risk-averse financial manager prefer? When determining the best asset for investment, the first fundamental consideration is that all the assets offer equal amounts of initial investment, which in this case is $15,000 for assets A, B, C, and D [Table above].