Assignments from the Readings FIN/419
Assignments from the Readings Ch. 5: P5–3, P5–4, P5–13 P5–3 Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as follows: Investment Expected return Expected risk index X 14% 7% Y 12 8 Z 10 9 a. If Sharon were risk-indifferent, which investments would she selectExplain why. Sharon would select X because the risk-indifferent manager’s attitude is no change in return would be required for the increase in risk and because the return is currently at 12% with a 6% index (half), X is the same amount of risk and return (half). b. If she were risk-averse, which investments would she select? Why? Because the risk-averse manager requires higher expected returns to compensate him or her for taking greater risk, Sharon would select X again because the return is two times greater than the risk in X. c. If she were risk-seeking, which investments would she select? Why? Because the risk-seeking manager is willing to give up some return to take more risk, Sharon would select Z because this
References: Gitman, L. J. (2009). Principles of managerial finance (12th ed.). Boston: Pearson Addison Wesley.