STAND ALONE RISK

Measuring Stand Alone Risk:

Using Historical Data
YEAR

2014 15%

2015 -5

2016 20
Measuring Stand Alone Risk:
The Coefficient of Variation
Formula:
CV=/k
Example 1.
k

US WATER 3.87 15

MARTIN 65.84 15
Example 2

PROJECT X 15% 60

PROJECT Y 3% 8
Risk Aversion and Required Returns

Suppose you have worked hard and saved $1 million, which you now
plan to invest. You can buy a 5% U.S. treasury note , and at the end of
one year you will have a sure $1.05 million, which is your original
investment plus $50,000 in interest. Alternatively, you can buy stock in
R&D Enterprises. If R&Ds research programs are successful, your stock
will increase in value to $2.1 million. However, if the research is a
failure, the value of your stock will go to zero, and you will be penniless.
You regard R&Ds chances of success or failure as being 50-50, so the
expected value of the stock investment is 0.5 ($0) + 0.5($2,100,000)=
$1, 050,000.