# A grouping of assets with same level of risk b

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A) grouping of assets with same level of riskB) collection of assets with the aim of maximizing the return for a given risklevelC) an investment in a single assetD) grouping of assets with the highest possible correlation
CHAPTER 8 Risk and ReturnDate: March 8, 2021P8-1 Rate of returna.Asset A: Expected rate of return = [\$6,100 + (\$71,000 - \$63,000)] / \$63,000] = 22.3%Asset B: Expected rate of return = [\$2,800 + (\$32,000 - \$35,000)] / \$35,000] = - 0.57%b.Paul should recommend to invest in Asset A since it has a higher expected rate of returnbut with the fact that both investments are equally risky.P8-2 Return CalculationsInvestmentRate of ReturnA-B51.11%C33.85%D36.83%E-P8-3 Risk preferencesa.If Stephen were risk neutral, he would probably select investment A or Investment Bwhich have the highest expected returns without taking into consideration the riskspresent.b.If Stephen were risk averse, he would probably choose investment A which has thehighest expected returns although there is also an increase in risk, there is acompensation for it by higher returns.Anegative rate of returnis a loss of theprincipal invested for a specific period of time.
c.If Stephen were risk seeking, he would probably invest his money in Investment Calthough it has the lowest expected returns amongst the three, Stephen being a riskseeking will probably select the one with highest risk.d.Being risk averse is the behavior which most financial managers exhibited, so Stephenwould probably prefer investment A for the increased in expected returns althoughaccompanied with an increase in risk.P8-4 Risk Analysisa.Project A: Range of rates of returns = 25% - 12% = 13%Project B: Range of rates of returns = 40% - 8% = 32%b.The less risky is Project A – the range of rates of return [of project B] being higher [thanProject A] makes project B the riskier investment while project A being less risky.c.I would choose project A over project B although the expected return is lower by only 2%compared to the latter but with lower range of returns makes it less risky which isapplicable to my risk preference.d.No.P8-5 Risk and probabilitya.Camera R: Range of rates of returns = 30% - 20% = 10%Camera S: Range of rates of returns = 35% - 15% = 20%b.Average returnsPossible OutcomesProbabilityReturnsPrjx rjCamera RPessimistic20%0.255%Most likely25%0.5012.5%Optimistic30%0.257.5%TotalAverage returns25%Camera SPessimistic15%0.203%Most likely25%0.5513.75%Optimistic35%0.258.75%TotalAverage returns25.5%c.Camera S is more risky as evident by its higher range of rates of return also it offers a lotmore returns which means more risks as compared with Camera R.
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