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Assume that investors are maximizing the expected return subject to not exceeding standard deviation they are...

Assume that investors are maximizing the expected return subject to not exceeding standard deviation they are willing to tolerate. Assume that investors can allocate their wealth across two assets. Asset 1 (e.g., bank account 1) has expected return of 1% and standard deviation of 0%. Asset 2 (e.g., bank account 2) has expected return 0.5% and standard deviation of 0%. here is no borrowing. Given that asset 1 is superior to asset 2 as it offers a higher expected return with the same standard deviation, will any investor allocate any fraction of their wealth to asset 2? Please explain the answer sufficently with details!

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Answer #1

ANSWER

NO INVESTOR WILL ALLOCATE THIER WEALTH TO ASSET 2 AS ASSET 1 IS SUPERIOR TO ASSET 2, ASSET 1 WITH SAME STANDARD DEVIATION OFFERS HIGHER RATE OF RETURN.

EXCEPTIONS: IN SOME CASES, INVESTORS WILL ALLOCATE THIER WEALTH TO ASSET 2, THEY ARE:

a) NON AVAILABILITY OF ASSET 1.

b) ASSET 1 IS AVAILABLE BUT ITS INVESTMENT IS INCONVENIENT.

c) INVESTOR WISHES TO GO FOR DIVERSIFICATION, INVESTORS DO NOT WISH TO PUT THEIR WHOLE WEALTH IN ONE ASSET.

d) AS IN THE QUESTION, IT IS GIVEN AS BANK ACCOUNT, APART FROM RISK AND RETURN, ASSET 2 HAS GOT MORE FEATURES OR BENEFITS ASSOCIATED WITH IT LIKE PRIVATE BANKING, FREE LOCKER FACILITY ETC.

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