a. As part of your company’s financial planning, you plan to buy a car for your new executive, which costs RM70,000. You have RM3,000 to invest as a lump sum today. You are a conservative investor and only invests in safe products. After approaching different banks, you are offered the following investment opportunities: i. Mija Bank’s savings account with an interest rate of 10.8% compounded quarterly. ii. Miju Bank’s savings account with an interest rate of 11.5% compounded annually. iii. Miji Bank’s savings account with an interest rate of 9.3% compounded monthly. How long will it take for you to accumulate enough money to buy the car in each of the above three cases?
QUESTION
a. As part of your company’s financial planning, you plan to buy a car for your new
executive, which costs RM70,000. You have RM3,000 to invest as a lump sum today.
You are a conservative investor and only invests in safe products. After approaching
different banks, you are offered the following investment opportunities:
i. Mija Bank’s savings account with an interest rate of 10.8% compounded quarterly.
ii. Miju Bank’s savings account with an interest rate of 11.5% compounded annually.
iii. Miji Bank’s savings account with an interest rate of 9.3% compounded monthly.
How long will it take for you to accumulate enough money to buy the car in each of the
above three cases?
b. Laila Ahmad, the
evaluate three prospective investments: A, B, and C. Laila 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 15% and a standard deviation
of 8%. The following table shows the expected returns and standard deviations of the
investments.
| Investment | Expected Return (%) | Standard Deviation (%) |
| 1 | 19 | 9 |
| 2 | 17 | 11 |
| 3 | 14 | 12 |
i. If Laila were risk neutral, which investments would he select? Explain why?
ii. If she were risk averse, which investments would she select? Why?
iii. If she were risk seeking, which investments would she select? Why?
iv. Given the traditional risk preference behavior exhibited by financial managers,
which investment would be preferred? Why?
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