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What will happen if two assets are earning the same expected return, but one is riskier...

What will happen if two assets are earning the same expected return, but one is riskier than the other?

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Answer #1

Answer:

Risk- It is the uncertainty that may arise in the future.

Return- It is the minimum profit that you receive from an investment.

If two assets are earning the same expected return but one is riskier than the other then the asset with lower risk will be preferred.

We know that "high risk, high gain, low risk, low gain". If two financial assets have different risk profiles but similar returns then asset with lower risk will be chosen over the asset with higher risk.

In this situation, investor can also calculate the expected returns of both the assets. Expected return is calculated by multiplying individual returns by the probability of each outcome. Asset whose expected return is higher, can be chosen for investment.

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