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Question
Consider three investments, where expected return is the expected value of the total return and risk is measured by the standard deviation. The investments are identical in every way except for their expected return and risk:Investment A: expected return = 2 percent, risk = 5 percent
Investment B: expected return = 5 percent, risk = 4 percent
Investment C: expected return = 14 percent, risk = 20 percent
Investment D expected return = 6 percent, risk = 12 percent
If a risk-averse investor can buy only one of the three investments and compares each investment with the other three, which investment option would he never choose?
a. Investment A, because its expected return is lower than Investment B and its risk is higher.
b. Investment B, because its expected return is so much lower than Investment C.
c. Investment C, because its risk exceeds its expected return.
d. Investments D, because the expected return to investment D is so much lower than Investment C.
Answer
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