Question

Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three...

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:

Investment Expected return Standard deviation

X 14% 7%

y 14% 8%

z 14% 9%

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 of15 %, 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?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Aminah, the financial manager for the financial manager for Hills Ltd., wishes to evaluate three prospective...
Aminah, the financial manager for the financial manager for Hills Ltd., wishes to evaluate three prospective investment X, Y, Z. Aminah, evaluate each of these investments to decide whether they are superior to investments that his company already has in place, which have an expected return of 10% and a standard deviation of 5%. The following table shows the expected returns and standard deviations of the investments Investment Expected return Standard deviation X 18% 8% Y 10 9 Z 8...
Vincent, the financial manager for NOOB Incorporation, wishes to evaluate three prospective investments: A, B, and...
Vincent, the financial manager for NOOB Incorporation, wishes to evaluate three prospective investments: A, B, and C. Vincent will evaluate each of these investments to decide whether they are superior to investments that his company already has in place, which have an expected return of 18% and a standard deviation of 8%. The expected returns and standard deviations of the investments are as follows: Investment                         Expected return                               Standard deviation A 25%                                                    9% B 17                                                        10 C...
You have been hired to evaluate the risk versus return of two prospective investments. One is...
You have been hired to evaluate the risk versus return of two prospective investments. One is a venture capital fund which is expected to return 33% over the next year with a standard deviation of 40%, while the other is an emerging markets equity portfolio which returns 23% with a standard deviation of 20%. The risk-free rate for the year is 2%. Define and describe the criterion you would use to evaluate these two investments from a risk versus return...
Compute the expected return, standard deviation, and value at risk for each of the following investments:...
Compute the expected return, standard deviation, and value at risk for each of the following investments: Investment (A): Pays $800 three-fourths of the time and a $1,200 loss otherwise. Investment (B): Pays $1,000 loss half of the time and a $1,600 gain otherwise. State which investment will be preferred by each of the following investors, and explain why. (i) a risk-neutral investor (ii) an investor who seeks to avoid the worst-case scenario. (iii) a risk-averse investor.
Compute the expected return, standard deviation, and value at risk for each of the following investments:...
Compute the expected return, standard deviation, and value at risk for each of the following investments: Investment (A): Pays $800 three-fourths of the time and a $1,200 loss otherwise. Investment (B): Pays $1,000 loss half of the time and a $1,600 gain otherwise. State which investment will be preferred by each of the following investors and explain why. (i) a risk-neutral investor (ii) an investor who seeks to avoid the worst-case scenario. (iii) a risk-averse investor.
The characteristics of four portfolios are shown below: Standard deviation Expected return % % Portfolio W...
The characteristics of four portfolios are shown below: Standard deviation Expected return % % Portfolio W 14 13 Portfolio X 26 16 Portfolio Y 15 11 Portfolio Z 10 7 Which portfolio would a risk-averse investor immediately reject? A        Portfolio W B        Portfolio X C        Portfolio Y D        Portfolio Z
Which of the following statements is correct?(x)Adding stocks to your portfolio can reduce firm-specific risk, but...
Which of the following statements is correct?(x)Adding stocks to your portfolio can reduce firm-specific risk, but you will not eliminate market risk.(y)A low standard deviation means that the investment is less likely to achieve a much higher return than its average, but a low standard deviation indicates that the investment is less risky.(z)Expected returns may differ from actual returns because of an unforeseen economic expansion. A.(x), (y) and (z)B.(x) and (y) onlyC.(x) and (z) onlyD.(y) and (z) onlyE.(x) only A...
V. Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return...
V. Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas’s research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of $20,000; investment Y had a market value of $55,000. During the year, investment X gener- ated cash flow of $1,500 and investment Y generated cash flow of $6,800. The current market...
The historical returns for two investments - A and B - are summarised in the following...
The historical returns for two investments - A and B - are summarised in the following table for the period 2013 to 2017. Use the data to answer the questions that follow. Year Rate of Return A B 2013 19% 8% 2014 1% 10% 2015 10% 12% 2016 26% 14% 2017 4% 16% Calculate the average return for each investment. Calculate the standard deviation for each investment’s returns. Which investment is more risky? Calculate the reward-to-variability (Sharpe) ratio for the...
A pension fund manager is considering three mutual funds. The first is a stock fund, the...
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are: Expected Return Standard Deviation Stock fund (S) 15 % 32% Bond fund (B) 9 % 23% The correlation between the fund returns is 0.15. 1. What would be the investment proportions...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT