Exercises Week 2 Essay Example | Topics and Well Written Essays - 1000 words

Exercises Week 2 - Essay Example Hence this will be the preferred investment, as the return is substantial and the risk is the lowest. c. If Sharon were risk – seeking, she would prefer the investment with the highest risk, unless a higher return is promised for a lower risk rate. In this case, investment X has a higher return for a lower risk. Also, investment Y has a return of 12%, same as that of the current return. Investment Y will also be preferred due to the risk seeking attitude. d. Based on the traditional risk preference behaviour exhibited by financial managers, the most preferred investment would be investment X. The main reason is that it has the lowest risk per unit of return (7%/14%) of 0.5 which is the same as that of the current investments of the firm. It is evident that the most likely values for both the options are the same. However, the worst case scenario for expansion A is a 16 % return whereas that of Expansion B is 10 %. Also, the return for expansion A lies within + 4 % of the most likely return of 20 %, whereas it is +8 % for expansion B. Hence the less risky project is Expansion A. c. If given the choice, I would prefer to take up the Expansion A, as it has lesser risk and the most likely return is the same as that of the high risk Expansion B. This certainly implies that I have a risk - averse behaviour. d. If the most likely outcome is 21% for expansion B, I would still prefer to opt for expansion A. the main reason is that the risk associated with expansion A is much lesser and the pessimistic outcome is very close to the most likely outcome. d. The expected return is the highest at 17.5 % for the portfolio 1 containing 100% of asset F compared to that of the other two alternatives. It is also evident that the three investment portfolios have the same risk associated with the returns. The coefficient of variation (return per unit of risk) is also higher for portfolio 1. Hence it is clear that