FIN 300 Risk and Return exam 2 - FIN300 Risk(Uncertainty and Return Risk preferences 1 risk taker 2 risk indifferent 3 risk adverse How can you measure

FIN 300 Risk and Return exam 2 - FIN300 Risk(Uncertainty...

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FIN300 Risk (Uncertainty) and Return
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Risk preferences: 1. risk taker 2. risk indifferent 3. risk adverse
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How can you measure risk? 1) Probability Distributions calculate the expected value (return) and standard deviation.
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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 X
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X 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? Which project has more variability (risk) ? We measure variability by the standard deviation
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Diversification and risk y Total risk = diversifiable risk + non- diversifiable risk “company specific” + “market risk”
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