Week 2-Assignments from Readings
Running head: WEEK 2 – ASSIGNMENT FROM READINGS
Week 2-Assignments from Readings
FIN/419
Week 2-Assignments from Readings
Chapter 5: Problem 5.3
a. If Sharon were risk-indifferent, which investments would she select? Explain why.
In case Sharon were risk-indifferent, she would pick Investments X and Y because they have higher earnings compared to the 12% needed profit. “The attitude toward risk in which no change in return would be required for an increase in risk” (Gitman, 2006, p. 230).
b. If she were risk-averse, which investments would she select? Why?
In case Sharon were risk-averse, she would pick Investment X because it has the maximum yield and the minimum risk. “The attitude toward risk in which an increased return would be required for an increase in risk” (Gitman, 2006, p. 230).
c. If she were risk-seeking, which investments would she select? Why?
In case Sharon were risk-seeking, she would pick Investment Y and Z because they have got a greater risk with no greater yield. “The attitude toward risk in which a decreased return would be accepted for an increase in risk” (Gitman, 2006, p. 230).
d. Given the traditional risk preference behavior exhibited by financial managers, which investment would be preferred? Why?
“Most managers are risk-averse; for a given increase in risk, they require an increase in return” (Gitman, 2006, p. 230). As most financial managers are risk-averse, the most liked investment is Investment X. Investment X offers the boost in yield for a boost in risk.
Chapter 5: Problem 5.4
a. Determine the range of the rates of return for each of the two projects.
“The range is found by subtracting the pessimistic outcome from the optimistic outcome” (Gitman, 2006, p. 231).
Expansion A: 24% - 16% = 8% Expansion B: 30% - 10% = 20%
b. Which project is less risky? Why?
The range of the result is smaller for Expansion A compared to
Week 2-Assignments from Readings
FIN/419
Week 2-Assignments from Readings
Chapter 5: Problem 5.3
a. If Sharon were risk-indifferent, which investments would she select? Explain why.
In case Sharon were risk-indifferent, she would pick Investments X and Y because they have higher earnings compared to the 12% needed profit. “The attitude toward risk in which no change in return would be required for an increase in risk” (Gitman, 2006, p. 230).
b. If she were risk-averse, which investments would she select? Why?
In case Sharon were risk-averse, she would pick Investment X because it has the maximum yield and the minimum risk. “The attitude toward risk in which an increased return would be required for an increase in risk” (Gitman, 2006, p. 230).
c. If she were risk-seeking, which investments would she select? Why?
In case Sharon were risk-seeking, she would pick Investment Y and Z because they have got a greater risk with no greater yield. “The attitude toward risk in which a decreased return would be accepted for an increase in risk” (Gitman, 2006, p. 230).
d. Given the traditional risk preference behavior exhibited by financial managers, which investment would be preferred? Why?
“Most managers are risk-averse; for a given increase in risk, they require an increase in return” (Gitman, 2006, p. 230). As most financial managers are risk-averse, the most liked investment is Investment X. Investment X offers the boost in yield for a boost in risk.
Chapter 5: Problem 5.4
a. Determine the range of the rates of return for each of the two projects.
“The range is found by subtracting the pessimistic outcome from the optimistic outcome” (Gitman, 2006, p. 231).
Expansion A: 24% - 16% = 8% Expansion B: 30% - 10% = 20%
b. Which project is less risky? Why?
The range of the result is smaller for Expansion A compared to