You are a financial advisor and have a client who is considering investing in a new mutual
Question:
You are a financial advisor and have a client who is considering investing in a new mutual fund. The fund has an expected return of 12% and a standard deviation of 18%. Your client is risk-averse and has a risk aversion coefficient of 3. In addition, your client exhibits the framing bias, which causes them to make investment decisions based on how information is presented.
a) Calculate the risk premium required for your client to invest in the mutual fund.
b) Your client is presented with two investment options: the mutual fund described above and a bond with an expected return of 6% and a standard deviation of 5%. The bond is framed as a safe investment. How might the framing bias affect your client's investment decision?
c) Calculate the Sharpe ratio for each investment option and recommend which one your client should choose based on risk-adjusted performance.
Intermediate Accounting
ISBN: 978-0324312140
16th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen