Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,
A) a risk averse investor will definitely select investment A because the standard deviation is lower.
B) a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%).
C) it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big.
D) rational investors could pick either A or B, depending on their level of risk aversion.

Question

Quizplus · Accepted Answer

The decision whether to choose investment A or B depends on the investor's level of risk aversion. A risk-averse investor may prefer investment A because of its lower standard deviation, even though the expected return is lower. However, a less risk-averse investor may prefer investment B because of its higher expected return, even though the standard deviation is higher. It ultimately comes down to the individual's risk tolerance and investment objectives. Therefore, rational investors could pick either A or B, depending on their level of risk aversion.

Investment a Has an Expected Return of 14% with a Standard