Investment A has an expected return of 14% with a standard deviation of 4%, whil

Question

Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore: it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big. a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($ 14% - 4%). a risk averse investor will definitely select investment A because the standard deviation is lower. rational investors could pick either A or B, depending on their level of risk aversion. You are thinking of adding one of two investments to an already well- diversified portfolio. Security A Security B Expected Return = 14% Expected Return = 12%Standard Deviation of Standard Deviation of Returns = 20.9% Returns = 10.1%Beta = 1.2 Beta = 1.2lf you are a risk-averse investor, which one is the better choice? Security A Security B Security B, but only if Security B's required return is greater than 12%. Either security would be acceptable because they have the same beta.

Explanation / Answer

d) rational investors could pick ither A or B, depending on thier level of risk aversion b) security B Reason CV of Security A = 20.9/14 = 1.49 CV of security B = 10.1/12 =0.84 lower the cv, lower the risk

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