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At this point, you believe customers are now ready to begin risk analysis and understand the risk differences among various investments. The most basic fact you want to convey to them is risk and return?the greater the risk, the greater the expected return. From there, you want to explain how expected returns can be calculated given the level of risk and outlining which investments are more risky and which are less risky. Create a file for uploading to the Discussion Board which contains all of the following information.
First, graph and explain the risk profile for the following:
Risk Expected Return
0.10 0.07
0.14 0.10
0.20 0.15
0.30 0.25
Second, given the following two investment options, explain what an investor would choose and why:
? Investment 1, an investment that is guaranteed a 6.5 percent return.
? Investment 2, an investment that has a probability 0.25 of earning 5%, a 0.50 probability of earning 10%, and a 0.25 probability of earning 0%.
Third, explain which of the investments below are riskier and why:
? Corporate stocks
? Corporate bonds
? Treasury bonds
Fourth, for the class of investors below, explain which investment vehicle they are likely to choose based on its risk profile (stock, corporate bond, and Treasury bond):
? A retiree that is looking for a safe investment
? A 28-year-old MBA graduate looking for high returns
? A forty-something professional looking for good investment income
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Solution Summary
This solution explains how to:
1) Graph and use a risk profile for an investment.
2) Assess which investments to choose based on risk and expected return.
3) Determine the risk factor with stocks, bonds, and treasury bonds.
4) Choose a suitable investment vehicle for an investor.
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