Why Return On Investment Is More Concerned Than The Risk Essay

1750 Words7 Pages
a. In this case, where return on investment is more concerned than the risk, if Sharon were risk-neutral, she would be more interested in investing X and Y because of their higher returns than the required return of 12%.
b. Unlike the risk-neutral status, if Sharon were risk-averse, she will take into account both the return on investment and the risk. So she will take into account the return on investment that will be higher with less risk. So she would be interested in the investment X because of its higher return to cover the risks to be taken.
c. Unlike the first two, if Sharon were risk-seeking, she will be looking for risk than return. So she will be more interested in investing Y and Z because of their greater risk without necessarily seeking for an increase in returns.
d. Financial managers often opt for investments that offers return (ROI) in proportion to the risk taken. Thus, the managers with the risk averse will certainly choose investment X because of it required return that increase in proportion to the risk.

Problems P8-8
a.
Based on range with a value of 0.04 with the less standard deviation of 2.9%, the project A is least risky.
b.
I would say that investors have a preference for higher return and less volatility, whereas we note in this case that the standard deviation measure does not take into account either the volatility or the return on investment. But fortunately the coefficient of variation gives us a measure that takes into account the return

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