Risk analysis Green Energy is considering expanding its investment in renewable energy generation. Two possible types, wind and solar, of energy generation are under review. After investigating the possible outcomes, the company made the estimates shown in the following table: . The pessimistic and optimistic outcomes occur with a probablity of 25%, and the most likely outcome occurs with a probability of 50%. a. Determine the range of the rates of return for each of the two projects. b. Which project is less risky? c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? d. Assume that solar farm's most likely outcome is 18% per year and that all other facts remain the same. Does this change your answer to part c? is less risky because it has a range for the rate of return. c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? (Select the best answer below.) O A. Choose wind farm because it is less risky and thus a better investment. O B. Since the most likely return for both projects is the same, you can choose either project regardless of your risk preference. OC. Choose solar farm because it has a higher optimistic rate of return regardless of its risk. O D. Since the average return for both projects is the same and the initial investments are equal, the answer depends on your risk preference. Since the returns d. Assume that expansion B's most likely outcome is 18% per year and that all other facts remain the same. Does this change your answer to part c? (Select the best below O A. No. O B. Yes. OC. Not enough information to answer.
Risk analysis Green Energy is considering expanding its investment in renewable energy generation. Two possible types, wind and solar, of energy generation are under review. After investigating the possible outcomes, the company made the estimates shown in the following table: . The pessimistic and optimistic outcomes occur with a probablity of 25%, and the most likely outcome occurs with a probability of 50%. a. Determine the range of the rates of return for each of the two projects. b. Which project is less risky? c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? d. Assume that solar farm's most likely outcome is 18% per year and that all other facts remain the same. Does this change your answer to part c? is less risky because it has a range for the rate of return. c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? (Select the best answer below.) O A. Choose wind farm because it is less risky and thus a better investment. O B. Since the most likely return for both projects is the same, you can choose either project regardless of your risk preference. OC. Choose solar farm because it has a higher optimistic rate of return regardless of its risk. O D. Since the average return for both projects is the same and the initial investments are equal, the answer depends on your risk preference. Since the returns d. Assume that expansion B's most likely outcome is 18% per year and that all other facts remain the same. Does this change your answer to part c? (Select the best below O A. No. O B. Yes. OC. Not enough information to answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
100%
Transcribed Image Text:in order to copy the contents of the data table below
(Click on the icon here
into a spreadsheet.)
Wind Farm
Solar Farm
Amount
Amount
Initial investment
$113 million
$113 million
Annual rate of return
Pessimistic
3%
- 7%
Most likely
17%
17%
Optimistic
33%
43%
Transcribed Image Text:Risk analysis Green Energy is considering expanding its investment in renewable energy generation. Two possible types, wind and solar, of energy generation are
under review. After investigating the possible outcomes, the company made the estimates shown in the following table: . The pessimistic and optimistic outcomes
occur with a probablity of 25%, and the most likely outcome occurs with a probability of 50%.
a. Determine the range of the rates of return for each of the two projects.
b. Which project is less risky?
c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk?
d. Assume that solar farm's most likely outcome is 18% per year and that all other facts remain the same. Does this change your answer to part c?
is less risky because it has a
range for the rate of return.
c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? (Select the best answer below.)
A. Choose wind farm because it is less risky and thus a better investment.
B. Since the most likely return for both projects is the same, you can choose either project regardless of your risk preference.
C. Choose solar farm because it has a higher optimistic rate of return regardless of its risk.
O D. Since the average return for both projects is the same and the initial investments are equal, the answer depends on your risk preference. Since the returns
d. Assume that expansion B's most likely outcome is 18% per year and that all other facts remain the same. Does this change your answer to part c? (Select the
best answer below.)
O A. No.
B. Yes.
O C. Not enough information to answer.
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