Question

Sharon smith, the financial manager for barnett corporation, wishes to evaluate three prospective investments: x, y, and z. sharon will evaluate each of these investments to decide whether they are superior to investments that her company already has in place, which have an expected return of 12% and a standard deviation of 6%. the expected returns and standard deviations of the investments are as follows: investmentexpected returnstandard deviation x14%7% y128 z109 sharon were risk neutral, which investments would she select? explain why.

Answer 1

Risk-neutral Sharon Smith would select Investment X for Barnett Corporation as it has the highest expected return of 14%, which is higher than the current investments with a 12% return.

Step-by-step explanation:

Sharon Smith, the financial manager for Barnett Corporation, is looking to evaluate three prospective investments: X, Y, and Z. Given that the company already has investments that offer a 12% expected return with a 6% standard deviation, and assuming Sharon is risk-neutral, she would evaluate the options purely on the basis of expected return without considering the associated risks.

Investment X has a 14% expected return, which is higher than the 12% return of the current investments, Investment Y has a 12% return, which is the same as the current investments, and Investment Z has a 10% return, which is lower. Since Sharon is risk-neutral, she would select Investment X because it has the highest expected return of 14%, surpassing the company's current investments.