Question

Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospective investments X. Y, and Z. Assume that the meąsure of risk Sharon cares about is an assets standard deviation. The expected returms and standard deviations of the investments are as follows E a. If Sharon were risk neutral, which investment would she select? Explain why b. If she were risk averse, which investment would she select? Why? c. if she were risk seeking, which investments would she select? Why? a fourth investment, W is available lt otters an expected return of 13%, and it has a standard deviation of 9% lf Sharon is m k averse, can you say which investment she will choose? Why or why not? Are there any investments that you are certain she will not choose? a. If Sharon wore risk neutral, which investment might she select? (Selel Data Table (Click on the icon located on the top-nght corner of the data table below in order to D. None of the three investments 12% 12% 12% 8% O B. I O C. Investment Z O D. None of the three investments Print Done c. If she were risk seeking which investments might she select? (Choos A. Type here t 0 Hi e rch

Answer 1

A	B	C	D	E	F	G	H	I	J	K	L
2
3		Investment	Expected Return	Standard Deviation
4		X	12%	7%
5		Y	12%	8%
6		Z	12%	9%
7
8		a)
9
10		Risk neutral investor look for higher expected return irrespective of the risks.
11
12		Since all the investments has same return but the risks are different,
13		therefore the investment with lowest risk to return ratio is to be selected.
14
15		Thus the investment X should be selected.
16
17		Hence the option (A) is correct.
18
19		b)
20
21		Risk averse investor like to accept lower return at lower risk than higher return at higher risk depending on risk aversion.
22
23		Since all the investments has same return but the risks are different,
24		therefore the investment with lowest risk to return ratio is to be selected.
25
26		Thus the investment X should be selected.
27
28		Hence the option (A) is correct.
29
30		c)
31
32		Risk seeking investor like to accept higher return at higher risk than lower return at lower risk.
33
34		Since all the investments has same return but the risks are different,
35		therefore the investment with lowest risk to return ratio is to be selected.
36
37		Thus the investment X should be selected.
38
39		Hence the option (A) is correct.
40
41		d)
42
43		Investment	Expected Return	Standard Deviation
44		X	12%	7%
45		Y	12%	8%
46		Z	12%	9%
47		W	15%	9%
48
49		Since investment X has lowest risk to return ratio amount X, Y and Z,
50		therefore investment X is preferred compared to investment Y and Z.
51
52		Investment W has higher return and risk compared to investment X.
53		Since the investment W has both risk and return higher than for investment X,
54		therefore it is difficult to choose between W and X as it depends on the degree of risk aversion
55		of investor.
56
57		Hence the option (c) is correct.
58