Explore BrainMass

# Risk Analysis in Investments

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

1) 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

2) 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%.

3) Explain which of the investments below are riskier and why:

Corporate stocks
Corporate bonds
Treasury bonds

4) 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

#### Solution Preview

The answers are also provided in an attached Excel file

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

Risk Expected Return
0.10 0.07
0.14 0.1
0.20 0.15
0.30 0.25

Risk: Return profile is almost linear. The higher the risk, the higher is the return.

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%.

Expected return of Investment 1 = 6.50%
Expected return of Investment 2 = 6.25% = ...

#### Solution Summary

This solution is comprised of a response which performs a risk analysis based both on different investments and different classes of investors. Additionally, a risk profile is graphed for risk and the expected return. An Excel file is also attached which provides the calculations and a graph which accompanies this solution.

\$2.19