The investment proposal with the greatest relative risk would have:
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A. B. C. D.B
In finance, relative risk is a measure of how risky an investment is compared to another investment or the overall market. It is often measured by the coefficient of variation (CV) of the net present value (NPV) of the investment proposal. The higher the CV, the greater the relative risk.
The coefficient of variation is calculated by dividing the standard deviation of the NPV by the expected value of the NPV, expressed as a percentage.
Therefore, the correct answer is B. The investment proposal with the highest coefficient of variation of NPV has the greatest relative risk. This means that the investment has a higher level of uncertainty and variability in its potential returns.
Option A is incorrect because the standard deviation alone does not provide information on the risk of the investment in relation to its expected return. An investment can have a high standard deviation but also a high expected return, making it less risky than an investment with a lower standard deviation but lower expected return.
Option C is also incorrect because the expected value of NPV does not take into account the variability of the returns. An investment with a high expected value but low variability can be considered less risky than an investment with a lower expected value but higher variability.
Option D is incorrect because the opportunity loss likelihood does not directly measure the risk of an investment. It is a measure of the potential loss that would occur if a different decision was made, and it is based on assumptions and hypothetical scenarios.