A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio.The two securities under consideration both have an expected return equal to 15 percent.However,the distribution of possible returns associated with Asset A has a standard deviation of 12 percent,while Asset B's standard deviation is 8 percent.Both assets are correlated with the market with ρ = 0.75.Which asset should the risk-averse investor add to his/her portfolio?
A) Asset A.
B) Asset B.
C) Both A and B.
D) Neither A nor B.
E) Cannot tell without more information.

Question

Quizplus · Accepted Answer

The risk-averse investor should choose Asset B because it has a lower standard deviation (8 percent) compared to Asset A (12 percent) while still providing the same expected return (15 percent). Given the investor's risk-aversion, they are more likely to prefer a lower risk asset with the same expected return.

A Highly Risk-Averse Investor Is Considering the Addition of an Asset