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Fin Week 2 Problems

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Submitted By Ellis7
Words 912
Pages 4
Sean Ellis
University of Phoenix
FIN 419

Week 2 Assignments
5.3) 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 select? Explain why. b. If she were risk-averse, which investments would she select? Why? c. If she were risk-seeking, which investments would she select? Why? d. Given the traditional risk preference behavior exhibited by financial managers, which investment would be preferred? Why?

(a) The risk-indifferent manager would accept Investments X and Y because these have higher returns than the 12% required return and the risk doesn’t matter. (b) The risk-averse manager would accept Investment X because it provides the highest return and has the lowest amount of risk. Investment X offers an increase in return for taking on more risk than what the firm currently earns. (c) The risk-seeking manager would accept Investments Y and Z

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