=+P8–3 Risk preferences Stephen So, the financial manager for Cathay Pacific Incorporation, wishes to evaluate three prospective investments: A, B, and C. Stephen will evaluate each of these investments to decide whether they are superior to investments that his company already has in place, which have an expected return of 15%

and a standard deviation of 8%. The following table shows the expected returns and standard deviations of the investments.

Investment Cash flow during period Beginning-ofperiod value End-ofperiod value A -$2,800 $ 23,400 $ 20,100 B 16,000 225,000 324,000 C 700 6,500 8,000 D 3,580 36,600 46,500 E -500 62,700 52,800 Investment Expected return Standard deviation A 18% 9%

B 15 10 C 12 11 Project A Project B Initial investment £35,000 £35,000 Annual rate of return Pessimistic 12% 8%

Most likely 18% 20%

Optimistic 25% 40%