Why Return On Investment Is More Concerned Than The Risk Essay

15. Investment A has an expected return of $25 million and investment B has an expected return of $5 million. Market risk analysts believe the standard deviation of the return A is $10 million, and for B is $30 million (negative returns are possible here).

Problem 1: Jonathon Barrs is a manager for Easy Manufacturing, LLC. He wishes to evaluate three possible investments. These investments are for the purchase of new machine tools from Germany, Japan, and a local US manufacturer. The firm earns 10% on its investments and they have a risk index of 5%. The chart below lays out the expected return and expected risks of the three projects.

An investor would invest in a security for the return. However that return comes with a premium, the Risk. The higher the risk an investor is willing to take the higher the returns would

a) Apply the coefficient-of-variation decision criterion to these alternatives to find out which is preferred by the angel investor, assuming that he/she is risk-averse.

a. It is any type of investment where the investor’s maximum possible loss is the amount invested

2) An investor's risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?

1. In terms of my personal characteristics, risk preference, and market beliefs, I concluded my investment philosophy as the following:

(See all the possible combinations on TABLE 2). 6. a) The portfolio’s risk would decrease if more stocks were.

3. Change leads to risk, and some significant changes have occurred. Which of these changes lead to the greatest risk?

From the Risk VS Return graph, we can see that for any given return, the portfolio with both REITs and commodities would yield the lowest risk. Also, the portfolio with only commodities would

b. Plot the CAL along with a couple of indifference curves for the investor type identified above. c. Use Excel’s solver to maximize the investor’s utility and confirm that you get a 50% allocation in stocks. 3. You can invest in a risky asset with an expected rate of return of 20% per year and a standard deviation of 40% per year or a risk free asset earning 4% per year or a combination of the two. The borrowing rate is 9% per year. a. What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which the allocation to this risky investment is 100%? b. Draw the Capital Allocation Line. Indicate the points corresponding to (i) 50% in the risk-less asset and 50% in the risky asset; and (ii) -50% in the riskless asset and 150% in the risky asset. c. Compute the expected rate of return and standard deviation for (i) and (ii). d. Suppose you have a target risk level of 50% per year. How would you construct a portfolio of the risky and the riskless asset to attain this target level of risk? What is the

Try to work out this question by assuming that Beta’s position had been 99% of equity funds invested in the index fund, and 1% in a riskless money market account. Imagine that you can switch from the money market account to CREIT, BG, or the index fund. Think about the condition for Sarah to be indifferent between switching to CREIT (or BG) and switching to the index.

High Tech and Collections are two other investment alternatives for the client. The expected rate of return is 12.4% for investing in High Tech and 1.0% for Collections. Investors might choose to invest in one of these two depending on how well they predict the economy will do. High Tech has a direct relationship with the movement of the economy. If the market is expected to increase, then this would be a good investment. Collections, however, moves in the opposite direction of the economy. If a decline is expected, then investors would use this as a hedge against the negative movement of the economy.

Finally, when the expected return up to 10 percent, it will result an undiversified and higher risk portfolio whereby dependent based on the higher risk financial assets.

2. Maximization of Shareholder wealth: Investment decision is linked with strategic and tactical business decisions and therefore need to achieve desired long-term objectives. The most usual objective being the maximization of shareholder wealth.