Sharon​ Smith, the financial manager for Barnett​ Corporation, wishes to select one of three prospective​ investments: X,​ Y, and Z. Assume that the measure of risk Sharon cares about is an​ asset's standard deviation. The expected returns and standard deviations of the investments are as​ follows: Investment Expected return Standard deviation X 17​% 7​% Y 17​% 8​% Z 17​% 9​%   a.  If Sharon were risk​ neutral, which investment would she​ select? Explain why. b.  If she were risk​ averse, which investment would she​ select? Why? c.  If she were risk​ seeking, which investments would she​ select? ​ Why? d.  Suppose a fourth​ investment, W, is available. It offers an expected return of 18​%, and it has a standard deviation of 9​%. If Sharon is risk​ averse, can you say which investment she will​ choose? Why or why​ not? Are there any investments that you are certain she will not​ choose?

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
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Sharon​ Smith, the financial manager for Barnett​ Corporation, wishes to select one of three prospective​ investments: X,​ Y, and Z. Assume that the measure of risk Sharon cares about is an​ asset's standard deviation. The expected returns and standard deviations of the investments are as​ follows:
Investment
Expected
return
Standard
deviation
X
17​%
7​%
Y
17​%
8​%
Z
17​%
9​%
 
a.  If Sharon were risk​ neutral, which investment would she​ select? Explain why.
b.  If she were risk​ averse, which investment would she​ select? Why?
c.  If she were risk​ seeking, which investments would she​ select? ​ Why?
d.  Suppose a fourth​ investment, W, is available. It offers an expected return of 18​%,
and it has a standard deviation of 9​%. If Sharon is risk​ averse, can you say which investment she will​ choose? Why or why​ not? Are there any investments that you are certain she will not​ choose?
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