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 measure of risk Sharon cares about is an asset's standard deviation. The expected returns and standard deviations of the investments are as follows: 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? d. Suppose a fourth investment, W, is available. It offers an expected return of 18%, and it has a standard deviation of 9%. If Sharon is risk 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 were risk neutral, which investment might she select? (Select the best answer below.) 0 Data Table I A. Investment Y B. Investment X C. Investment z. OD. None of the three investments. (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) 2 Investment NX Expected return 17% 17% 17% Standard deviation 7% 8% 9% Print Done

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- 2x enter $ % , fotos conditional trade styles lose Styles GT HA 5 ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General Ea Copy Fill Paste A Merge & Center - BI U D $ -% Conditional Format Cell Insert Delete Format Sort & Find & Format Painter Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Cells Editing GR252 fax GR GS GU | GV GW GX GY GZ 252 253 IF SHE IS RISK NEUTRAL, SHE CAN SELECT ALL THE THREE 254 RISK NEUTRAL IMPLIES SHE IS NOT CONCERNED ABOUT THE RISK 255 BUT AS PER OPTION 256 B: INVESTMENT X HIGHER RETURN, LOWER RISK 257 258 259 IF SHE IS RISK AVERSE, THAT IS WANT TO HAVE LOWER RISK WITH SAME LEVEL OF RETURN 260 THEN SHE WILL PREFER INVESTMENT X 261 IF SHE IS RISK SEEKER, THAT IS WANT TO TAKE HIGHER RISK 263 SHE WILL PREFER INVESTMENT Z 264 265 D IF SHARON IS RISK AVERSE, IT IS NOT CLEAR SHE WILL GO FOR W OR X 266 BUT W AND X ARE BETTER OPTIONS THAN Y AND Z 267 SO NOW FROM W AND X, WHICH ONE TO SELECT DEPENDS ON HER RISK TOLERANCE 268 269 M KE CAPM UTILITY, SHARPE, beta convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio cap stru WACC Rea ferences: AG470 BOI 140% 6. B 9 . * * 262 R RESI el - 50- ENG 31-10-2019