From the Previous Question Sally Has Now Asked You to Calculate

question 28

Essay

From the previous question Sally has now asked you to calculate the risk attached to each of the investments proposed in Nimasae, Memorest and Tenex. She has also sought comments on the return / risk relationship for each of the individual investments by ranking each of the return and risk of the investments from lowest to highest. Further demonstrate your discussion of the return / risk relationship by showing Sally the likely range of returns that could eventuate for each asset with a 95% level of accuracy.

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Definitions:

Asymmetric Information

An instance where in a transaction, one entity has higher or more detailed information than another.

Principal-Agent Problem

A dilemma in economics arising when one party (the agent) is able to make decisions and/or take actions on behalf of, or that impact, another party (the principal).

Moral-Hazard Problem

A situation where one party engages in risky behavior knowing that it is protected against the consequences, often because another party bears the cost of those actions.

Moral-Hazard Problem

The moral-hazard problem arises in situations where one party's willingness to take risks is increased because the negative consequences of those risks will be borne by another party.