Derek has zero tolerance for risk. List the five assets below in the ascending order of his most likely preference for them (least preferred first, most preferred last). Assume that the likelihood of default for Caspian Sea (Plolluted Sea) is zero (50%).

Question

a) Preferred stock of Caspian Sea
b) Bond of Caspian Sea
c) Common stock of Caspian Sea
d) preferred stock of Polluted Sea
e) common stock of Polluted Sea

Answer 1

Given Derek's zero tolerance for risk, he will prefer assets that are less risky and have a higher likelihood of preserving capital. Therefore, we need to rank the assets from least preferred to most preferred based on their risk levels:

1. Common stock of Polluted Sea (e) - This is likely the least preferred because common stocks are generally the riskiest assets and their likelihood of losing value is high, especially for a company referred to as "Polluted Sea."

2. Common stock of Caspian Sea (c) - This will be preferred over the common stock of Polluted Sea, but it is still a common stock and thus carries high risk.

3. Preferred stock of Polluted Sea (d) - Preferred stocks are generally safer than common stocks, so this would rank higher than the common stocks, but still carries risk due to being associated with the Polluted Sea entity.

4. Bond of Caspian Sea (b) - Bonds are typically less risky than stocks, and since the likelihood of default for Caspian Sea is considered zero, this would be a more preferred asset.

5. Preferred stock of Caspian Sea (a) - Among the options, this is likely the most preferred asset due to its combination of being preferred stock and being associated with the Caspian Sea entity, which has a zero-risk of default.

So, the order of preference from least preferred to most preferred is:

1. Common stock of Polluted Sea (e)
2. Common stock of Caspian Sea (c)
3. Preferred stock of Polluted Sea (d)
4. Bond of Caspian Sea (b)
5. Preferred stock of Caspian Sea (a)