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You have two possible projects for your business, and you are trying to identify the future year uncertainties for each project's cashflow. For each project,
You have two possible projects for your business, and you are trying to identify the future year uncertainties for each project's cashflow. For each project, you estimated that there will be five different scenarios of cash flow with different probabilities, as shown below: a) Calculate the expected cash flow of each project. b) Calculate the standard deviation and coefficient of variation of each project. Which project is riskier? c) To lower the overall business risk, you decided to invest in both projects. You allocate 60% of your money in Project A, and 40\% in Project B. The correlation coefficient between A and B is 0.5 . What is the expected return for the diversified business? d) What is the standard deviation of the diversified business? e) Now, assume that the correlation coefficient is -0.5 . What will happen to the standard deviation relative to your answer in part e ? (No need to show the calculation) f) What are some of the pros and cons of having two projects with negative correlation? You have two possible projects for your business, and you are trying to identify the future year uncertainties for each project's cashflow. For each project, you estimated that there will be five different scenarios of cash flow with different probabilities, as shown below: a) Calculate the expected cash flow of each project. b) Calculate the standard deviation and coefficient of variation of each project. Which project is riskier? c) To lower the overall business risk, you decided to invest in both projects. You allocate 60% of your money in Project A, and 40\% in Project B. The correlation coefficient between A and B is 0.5 . What is the expected return for the diversified business? d) What is the standard deviation of the diversified business? e) Now, assume that the correlation coefficient is -0.5 . What will happen to the standard deviation relative to your answer in part e ? (No need to show the calculation) f) What are some of the pros and cons of having two projects with negative correlation
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