A grouping of assets with same level of risk b

A) grouping of assets with same level of risk
B) collection of assets with the aim of maximizing the return for a given risk
level
C) an investment in a single asset
D) grouping of assets with the highest possible correlation
CHAPTER 8 Risk and Return
Date: March 8, 2021
P8-1 Rate of return
a. 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 return
but with the fact that both investments are equally risky.
P8-2 Return Calculations
Investment Rate of Return
A -
B 51.11%
C 33.85%
D 36.83%
E -
P8-3 Risk preferences
a. If Stephen were risk neutral, he would probably select investment A or Investment B
which have the highest expected returns without taking into consideration the risks
present.
b. If Stephen were risk averse, he would probably choose investment A which has the
highest expected returns although there is also an increase in risk, there is a
compensation for it by higher returns.
A negative rate of return is a loss of the
principal invested for a specific period of time.

c. If Stephen were risk seeking, he would probably invest his money in Investment C
although it has the lowest expected returns amongst the three, Stephen being a risk
seeking will probably select the one with highest risk.
d. Being risk averse is the behavior which most financial managers exhibited, so Stephen
would probably prefer investment A for the increased in expected returns although
accompanied with an increase in risk.
P8-4 Risk Analysis
a. 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 [than
Project 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 is
applicable to my risk preference.
d. No.
P8-5 Risk and probability
a. Camera R: Range of rates of returns = 30% - 20% = 10%
Camera S: Range of rates of returns = 35% - 15% = 20%
b. Average returns
Possible Outcomes Probability Returns Pr
j
x r
j
Camera R
Pessimistic 20% 0.25 5%
Most likely 25% 0.50 12.5%
Optimistic 30% 0.25 7.5%
Total Average returns 25%
Camera S
Pessimistic 15% 0.20 3%
Most likely 25% 0.55 13.75%
Optimistic 35% 0.25 8.75%
Total Average returns 25.5%
c. Camera S is more risky as evident by its higher range of rates of return also it offers a lot
more returns which means more risks as compared with Camera R.