Pease review the problem illustrated below.
Question: A manager wishes to evaluate three possible investments. These investments are for the purchase of a new machine tools from Germany, Japan, and US. The firm earns 10% on its investments and they have a risk index of 5%. The attached chart lays out the expected return and expected risks of the three projects.
Investment Expected Return Expected Risk
German Tools 15.00% 8.00%
Japanese Tools 13.00% 9.00%
Local Manufacturer 11.00% 7.00%
Q1. If the manager were risk-indifferent, which investments would he select? Why?
Q2. If he was risk-adverse which investments would he select? Why?
Q3. If he was risk seeking which investments would he select? Why?
Q4. Given the traditional risk preference behavior exhibited by financial managers, which investment would be preferred? Why?