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 15% 6%
Y 13% 7%
Z 17% 5%
(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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Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospecti...
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