Suppose an investor with state-independent tastes is offered the choice between investment A and investment B.Investment A offers profit of $2,000 with probability 0.4, $4,000 with probability 0.2 and $6,000 with probability 0.4.Investment B offers profit of $2,000 with probability of 0.5 and $6,000 with probability 0.5.If the investor is risk averse, he will choose investment A.

Question

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A risk averse investor will choose the investment with the lower risk, which in this case is investment A. Although investment B offers a higher expected profit, it also has a higher variability or risk. Investment A offers lower expected profit but has less variability, making it the more suitable choice for a risk averse investor.

Suppose an Investor with State-Independent Tastes Is Offered the Choice