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(Solution Library) Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y,

Question: Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as follows:

Investment Expected return Expected risk index
X 14% 7%
y 12 8
z 10 9
  1. If Sharon were risk-indifferent, which investments would she select? Explain why.
  2. If she were risk-averse, which investments would she select? Why?
  3. If she were risk-seeking, which investments would she select? Why?
  4. Given the traditional risk preference behavior exhibited by financial managers, which investment would be preferred? Why?

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