Which asset would the risk - averse financial manager prefer? (See below.) Asset Initial investment Annual rate of return Pessimistic Most likely Optimistic A $15,000 8% 12% 14% B $15,000 5% 12% 13% C $15,000 13% 12% 15% D $15,000 7% 12% 14%

Which asset would the risk - averse financial manager prefer? (See below.) Asset Initial investment Annual rate of return Pessimistic Most likely Optimistic A $15,000 8% 12% 14% B $15,000 5% 12% 13% C $15,000 13% 12% 15% D $15,000 7% 12% 14%

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

See similar textbooks

Related questions

Q: a. Assuming that the desired rate of return is 6%, determine the net present value for the proposal.…

A: Net present value method: Net present value method id the method which is used to compare the…

Q: State of Economy Bust Boom Probability of State of Economy 0.30 0.70 Bust Security Returns if State…

A: Expected return is defined as the amount of money an investor could earn or lose on an investment at…

Q: What is the expected value of the outcomes?

A: Expected income is also called the expected return. It is the profit or loss expected to be…

Q: Data table (Click on the icon here in order to copy the contents of the data table below into a…

A: Range = Highest value - lowest value Camera - R = 31 - 20 = 11%Camera - S = 30 - 16 = 14%

Q: Probability State of of State of Economy Bust Boom Economy 0.60 0.40 Security Returns if State…

A: Security returns if states occurState of economyProbability of state of the…

Q: Consider the following information State Probability X…

A: An expected return is the return that will be received on the particular stock at the end of the…

Q: Michael We have created various scenarios each with a forecast for our expected sales volume,…

A: For Scenario A:Annual Cash Flow = $648,050PV annuity factor = 3.6048Total Present Value of Cash…

Q: Security Returns if State Occurs State of Economy Probability of State of Economy Roll Ross Bust .40…

A: Data given: State of Economy Probability of State of Economy Security Returns if State Occurs…

Q: Consider the following information State Probability X…

A: An expected return is the return that will be received on the particular stock at the end of the…

Q: Suppose a world has two risky assets: StkC and StkD. The following table shows the holding period…

A: To Find: fifth-percentile value at risk (VaR) of holding StkC?

Q: Exercise #3: Value (EMV) Question 1: Which project you will choose based on EMV estimation? Why?…

A: The best Project is Project A. Workings:- Computation of EVM…

Q: Exhibit 6.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Asset (A) Asset (B) E(RA)…

A: CAPM stands for Capital Asset Pricing Model which indicates the relation between the expected…

Q: There are two risky assets, and their volatilities are 8% (Asset 1) and 24% (Asset 2). Their return…

A: If two Assets (i.e Asset 1 and Asset 2) are perfectly negatively correlated i.e their return…

Q: An investment firm is considering two alternative investments, A and B, under two possible future…

A: Given information : Two alternative investments with economic conditions good and poor and their…

Q: Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.30…

A: Expected return is the average return that an investor will earn over time. Standard Deviation…

Q: A firm has three investment alternatives. Payoffs are in thousands of dollars. a. Using the expected…

A: The decision based on the expected value approach is based on the sum of cash flows for a particular…

Q: State of Economy Bust Boom State of Economy Probability of State of Economy Bust Boom Probability of…

A: The expected return of the portfolio refers to the profit that the portfolio provides to its…

Q: Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.20…

A: Scenario Probability Stocks Bonds Recession0.2-5%19%Normal economy 0.620%10%Boom 0.227%4%

Q: Consider an investment with the following probability distribution: Probability Payoff 0.40 30.0…

A: Probability is the expectation or estimate which is forecasted. For calculation of expected return,…

Q: onsider the following information (Assume that Security M and Security N are in the same financial…

A: Expected return is calculated by using CAPM equation. CAPM measures systematic risk Expected return…

Q: Q2.a. Consider the following scenario analysis.< Scenario Probability Recession Normal Boom 0.20…

A: STEP 1 The positive square root of the variance is the standard deviation. One of the fundamental…

Q: Consider the following scenario analysis: Scenario Recession Normal economy Boom Rate of Return…

A: Scenario Analysis Explained Step-by-StepThis analysis helps us understand the potential performance…

Q: 8. Calculate the rate of return earned over a specified period of time. Explain the outcome based on…

A: Here, InvestmentCash Flow during the Period (N$)Beginning of the Period Value (N$)End of the…

Q: Consider the following scenario analysis: Scenario Recession Normal economy Boom Rate of Return…

A: Standard deviation evaluates the extent of data variability around the mean, providing valuable…

Q: What is the expected return of a portfolio of two risky assets if the expected return E(Ri),…

A: A collection of multiple investment avenues in which an investor puts in the funds is considered a…

Q: Consider the following scenario analysis: Scenario Recession Normal economy Boom Rate of Return…

A: Treasury Bonds: Treasury bonds, issued by the U.S. Department of the Treasury, are long-term debt…

Q: What is the risk premium for a company that has a yield rate of 6.12% when the risk-free rate is…

A: The objective of the question is to calculate the risk premium for a company. The risk premium is…

Q: Investment 1 Investment 2 Investment 3 Investment 4 RATE Answer 7% 6% 1% NPER 10 Answer 4 24 PV…

A: The concept that helps to evaluate the future or present value of the cash flow is term as the time…

Q: You have the following probability distribution of returns for XYZ company. Calculate the expected…

A: r1=19%r2=8.5%r3=-18.0%p1=25%p2=50%p3=25%

Q: At MARR of 12%, which project would you select? a. Select A as it has a higher rate of return. b.…

A: Net Present Value is the difference between the current value of cash inflow and cash outflow for a…

Question

Which asset would the risk-averse financial manager prefer? (See below.)
Asset
Initial investment
Annual rate of return
Pessimistic
Most likely
Optimistic
O A. Asset D
OB. Asset A
OC. Asset C
OD. Asset B
A
$15,000
8%
12%
14%
B
$15,000
5%
12%
13%
C
$15,000
13%
12%
15%
D
$15,000
7%
12%
14%

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Define=risk averse

VIEW

Step 2: Calculation of risk

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

ff2
The following project is under consideration: Event Pessimistic .3 Neutral Prob. CFO CF1 CF2 CF3 Optimistic .3 Answer: .4 Check -100 105 -115 -100 110 0 0 0 The firm's cost of capital is 10%. Calculate the standard deviation of the project's NPV. Enter your answer without a $ -100 115 115 0
Question 2: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?
Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.20 0.60 0.20 Required A Required B Required C Rate of Return Stocks -7% 22% 33% Stocks Bonds a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer? Expected Rate of Return 16.4 % 11.4 % Bonds 20% Complete this question by entering your answers in the tabs below. 11% 7% You received partial credit in the previous attempt. Calculate the expected rate of return and standard deviation for each investment. Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place. Standard Deviation 12.5 % 13.9 %
9. Consider the case of two financial assets and three market conditions (states). The table below gives the respective probability for each market condition and the return of each asset in each one of them. Market Conditions State Recession Normality Expansion Probability of state 10% 60% 30% Return of asset A -20% 20% 70% Return of asset B -10% 10% 35% a. Derive the expected returns and the standard deviation of returns for the two assets above. b. Consider the portfolio with 50% investment in each of the two assets above. Calculate the expected return and the standard deviation of the portfolio. c. Estimate the equation of the efficiency frontier.
9. A risk averse, wealth maximising, investor is faced with a choice between four investments (P, Q, R and S) that have profiles as follows:   Mean return (%) Variance (%) P 19 18   Q 16 17  R 22 16   S 20 16   Between which pair of these investments would the investor find it impossible to distinguish on the basis of the above information? A. P and Q   B. R and S   C. P and S   D. Q and R
Sangita

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS