A person is trying to decide which of two possible mutual funds to invest his money in. Let the random variable X represent the annual return for mutual fund A and let the random variable Y represent the annual return for fund B. It is known that the mean, µ, of X is 10.3% and the standard deviation, Ϭ, of X is 4.2%. It is also known that the mean, µ, of Y is 11.3% and the standard deviation, Ϭ, of Y is 7.2%. Which fund do you think the person would prefer if he is a short-term investor? Which fund do you think he would prefer if he is a long-term investor? Explain your thinking.

Question

Quizplus · Accepted Answer

The Answer is A short-term investor would probably prefer fund A as it is less volatile (the standard deviation of the returns is smaller). A long-term investor would probably prefer fund B as it has a higher mean return. For a long-term investor the volatility of fund B poses less of a risk.

A Person Is Trying to Decide Which of Two Possible