In your first job as a security analyst, you are asked to compare the following securities: a)
Question:
In your first job as a security analyst, you are asked to compare the following securities:
a) Given what you have learned about risk and return, which security from each pair would you prefer? (4 marks)
I. A or B?
II. B or C?
III. C or D?
IV. D or A?
b)Why do we generally prefer higher return and lower risk? Does everybody perceive risk the same? Discuss. In your discussion, use the terms utility, consumption, opportunity set, and risk aversion. (6 marks)
c)Given that most investors dislike risk, discuss the role of a risk premium in determining appropriate returns. Explain how risk premium is captured in for stocks and bonds. Hint: You can use the formulae that we have used to calculate bond and stock prices (4 marks).
Security | Excess Return p.a. | Excess Standard deviation p.a. |
A | 10% | 30% |
B | 8% | 30% |
C | 12% | 28% |
D | 18% | 32% |
Expert Answer:
a To determine which security we would prefer in each pair we need to compare the risk and return characteristics of each security I A or B Security A has an excess ... View the full answer
