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Helen Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y and Z.

Helen 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 investment are as follows:

Investment Expected Return Expected Risk Index

X 14% 7%

Y 12% 8%

Z 10% 9%

a) If Sharon were risk-indifferent, which investments would she select? Explain why. (10 Marks)

b) If she were risk-averse, which investments would she select? Why? (10 Marks)

c) If she were risk-seeking, which investments would she select? Why? (10 Marks)

d) Given the traditional risk preference behaviour exhibited by financial managers, which investment would be preferred? Why? (10 Marks)

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