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Investments A and B both offer an expected rate of return of 12. The risk (standard...

Investments A and B both offer an expected rate of return of 12. The risk (standard deviation) of A is 30 percent and the risk of B is 20 percent. Under the assumption that the an investor is risk averse and she wishes to invest in either A or B, then that investor should

.a The answer cannot be determined without knowing investors' risk preferences.

b. prefer A to B.

c. prefer a portfolio including both A and B.

d. prefer B to A.

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Answer #1
  • As investment B is giving the same expected return but the risk is lower, it is better that the risk averse investor prefers B to A. So the correct option is option d
  • A portfolio will only increase the risk without increasing the return. So option c is incorrect.
  • Option A implies that the investor chooses a more risky investment, which is not aligned to investor's risk averse nature, So option b is in correct
  • As it can be clearly answered that investment B is a better choice, so option a is incorrect
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