investment expected return risk
A 6.50% 1.90%
B 10.11% 11.50%
C 7.54% 8.42%
D 9.42% 12.65%
E 7.00% 1.60%
What can we say about the choice of a risk-averse, risk-loving, and risk-neutral individual? Explain. (12 points).
A risk-averse investor will always choose E because it offers a good enough return with the lowest risk. Since A and E have very low risk, when we compare them we see that it doesn't make sense to choose A because compared to E, it is offering a lower return for a higher risk.
A risk-loving investor will choose the highest return available irrespective of the risk. Hence, he/she would take investment B. (Comparing B and D, B is better in terms of return as well as risk).
A risk-neutral investor will choose the option which has the highest return per unit of risk. Hence, the values of return per unit risk will be:
A = 6.5/1.9 = 3.421
B = 10.11/11.5= 0.879
C= 7.54/8.42 = 0.895
D = 9.42/12.65 = 0.7446
E = 7/1.6 = 4.375
Hence, E is the option a risk-neutral investor would choose.
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