Assume that two investment opportunities have identical expected values of $100,000. Investment A has a variance of 25,000, while investment B's variance is 10,000. We would expect most investors (who dislike risk) to prefer investment opportunity:
A) A because it has less risk.
B) A because it provides higher potential earnings.
C) B because it has less risk.
D) B because of its higher potential earnings.

Question

Quizplus · Accepted Answer

Most investors who dislike risk prefer investments with lower variance, as it indicates a lower level of risk. Therefore, investment opportunity B is more preferable as it has a lower variance of 10,000 compared to investment opportunity A with a variance of 25,000. The expected value of the investments is the same at $100,000, but investment B has less risk.

Assume That Two Investment Opportunities Have Identical Expected Values of $100,000