You are going to invest all of your funds in one of three projects with the following distribution of possible returns:
PROJECT 1 PROJECT 2

PROJECT 3

If you are a risk averse investor,which one should you choose?
A) Project 1
B) Project 2
C) Project 3
D) Either Project 1 or Project 2 because they have the same expected return

Question

You are going to invest all of your funds in one of three projects with the following distribution of possible returns:
PROJECT 1 PROJECT 2

PROJECT 3

If you are a risk averse investor,which one should you choose?
A) Project 1 
B) Project 2 
C) Project 3 
D) Either Project 1 or Project 2 because they have the same expected return

Quizplus · Accepted Answer

As a risk averse investor, it is best to minimize risk even if it means sacrificing some potential return. Project 3 has the lowest standard deviation, indicating a more predictable return. Projects 1 and 2 have higher standard deviations and therefore, more risk. While Project 1 and 2 have higher expected returns, the potential losses are also greater. Therefore, Project 3 is the best choice for a risk averse investor.

You Are Going to Invest All of Your Funds in One