If the expected return of stock A is 12 percent and that of stock B is 14 percent, and both have the same variance, then nondiversified investors would prefer stock B to stock A.

Question

Quizplus · Accepted Answer

Nondiversified investors would prefer stock B to stock A because it has a higher expected return. However, this decision may not be optimal for diversified investors who consider not only the expected return but also the risk (variance) of each stock.

If the Expected Return of Stock a Is 12 Percent