Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option 1 2 3 Payoff One Year from Now 100% chance of receiving $1,100 50% chance of receiving $1,000 50% chance of receiving $1,200 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? O The investor will choose option 1. O The investor will choose option 2. O The investor will choose option 3. O The investor will be indifferent toward these options. In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin? O Everything else remaining constant, Devin will prefer option 3. O Everything else remaining constant, Devin will prefer option 2. O Everything else remaining constant, Devin will prefer option 1. O None of these options is preferred.
Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option 1 2 3 Payoff One Year from Now 100% chance of receiving $1,100 50% chance of receiving $1,000 50% chance of receiving $1,200 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? O The investor will choose option 1. O The investor will choose option 2. O The investor will choose option 3. O The investor will be indifferent toward these options. In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin? O Everything else remaining constant, Devin will prefer option 3. O Everything else remaining constant, Devin will prefer option 2. O Everything else remaining constant, Devin will prefer option 1. O None of these options is preferred.
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
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Transcribed Image Text:Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a
payoff, also described below, one year from now.
Option
1
2
3
Payoff One Year from Now
100% chance of receiving $1,100
50% chance of receiving $1,000
50% chance of receiving $1,200
50% chance of receiving $200
50% chance of receiving $2,000
If Erik is risk averse, which investment will he prefer?
O The investor will choose option 1.
O The investor will choose option 2.
O The investor will choose option 3.
O The investor will be indifferent toward these options.
In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin?
O Everything else remaining constant, Devin will prefer option 3.
O Everything else remaining constant, Devin will prefer option 2.
O Everything else remaining constant, Devin will prefer option 1.
O None of these options is preferred.
Transcribed Image Text:3. Measuring stand-alone risk using realized (historical)data
Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results.
Analysts across companies use realized stock returns to estimate the risk of a stock.
Consider the case of Blue Llama Mining Inc. (BLM):
Five years of realized returns for BLM are given in the following table. Remember:
1. While BLM was started 40 years ago, its common stock has been publicly traded for the past 25 years.
2. The returns on its equity are calculated as arithmetic returns.
3. The historical returns for BLM for 2014 to 2018 are:
2014
2015 2016 2017
Stock return 6.25% 4.25% 7.50% 10.50%
2018
3.25%
Given the preceding data, the average realized return on BLM's stock is
The preceding data series represents
historical returns is
of BLM's historical returns. Based on this conclusion, the standard deviation of BLM's
If investors expect the average realized return from 2014 to 2018 on BLM's stock to continue into the future, its coefficient of variation (CV) will be
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