P5–3 Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as follows:

Expected        Expected

Investment                 return             risk index

X                     14%                      7%

Y                     12                          8

Z                      10                        9

a. If Sharon were risk-indifferent, which investments would she select? Explain why.

b. If she were risk-averse, which investments would she select? Why?

c. If she were risk-seeking, which investments would she select? Why?

d. Given the traditional risk preference behavior exhibited by financial managers, which   

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