Question

The characteristics of four portfolios are shown below: Standard deviation Expected return % % Portfolio W...

  1. The characteristics of four portfolios are shown below:

Standard deviation

Expected return

%

%

Portfolio W

14

13

Portfolio X

26

16

Portfolio Y

15

11

Portfolio Z

10

7

Which portfolio would a risk-averse investor immediately reject?

A        Portfolio W

B        Portfolio X

C        Portfolio Y

D        Portfolio Z

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Homework Answers

Answer #1

Risk averse investor:

Risk averse investor is an investor who prefers LOWER RETURNS with KNOWN RISKS rather than HIGHER RETURNS with UNKNOWN RISKS.

Risk averse investors do not like to take risk no matter how big the payoff could be.

Eventhough some investments results in higher payoff such as those in stock market, a risk averse investor would rather get a definite return, such as investing in government bonds.

Answer - B

Based on the above explanation a risk averse investor will not take risk eventhough the return is high.

In the given question, risk (26%) of portfolio X is higher than the other portfolio's and hence the risk averse investor will immediately reject Portfolio X

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