Investments B and C both have the same standard deviation of 20 percent and have the same correlation to the market portfolio. If the expected return on B is 15 percent and that of C is 18 percent, then the investors would
A)prefer B to C.
B)prefer C to B.
C)reject both B and C.
D)The answer cannot be determined without knowing investors' risk preferences.

Question

Quizplus · Accepted Answer

Since investments B and C have the same standard deviation and correlation to the market portfolio, the only criteria for comparison is the expected return. Since C has a higher expected return than B, investors would prefer C to B.

Investments B and C Both Have the Same Standard Deviation