FIN Exam 3 - Risk Return(Chp 7 Risk Preferences Risk Taker The person that takes the riskier investment even though both gives you same expected return

# FIN Exam 3 - Risk Return(Chp 7 Risk Preferences Risk Taker...

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Risk & Return (Chp. 7) 02/24/2016 ° Risk Preferences: Risk Taker – The person that takes the riskier investment even though both gives you same expected return Risk Indifferent – With same expected return, takes the smaller amount of risk Risk Adverse – Same expected return, doesn’t matter which one you take ° How can you measure risk? 1) Probability Distributions – calculate the expected value (return) and standard deviation ° ° Builtrite is considering the following two mutually exclusive projects: Project A: ° Belief Cash Flow Prob Weighted Average ° Pessimistic 40 X .20 = 8 ° Most likely 45 .60 27 ° Optimistic 50 .20 10 Expected return = 45 ° Project B: ° Belief Cash Flow Prob Weighted Average ° Pessimistic 0 X .20 = 0 ° Most likely 45 .60 27 ° Optimistic 110 .20 22 ° Expected return = 49 ° Which project should be picked? Project A ° Which project has more variability (risk)? Project B is “riskier” ° ***We measure variability by the standard deviation °
° ° 2) Coefficient of variation “CV”