An investor is considering two equally risky investments.Investment A is expected to return $1,000 per year for the next 5 years.Investment B is expected to return $6,000 at the end of 5 years.Which of the following statements is most correct if both investments A and B have the same cost?
A) A risk averse investor will select investment B because it is expected to provide the most cash ($6,000 $5,000).
B) A risk averse investor will select investment A because it provides cash earlier than investment B.
C) The investor will select investment A only if the cost is less than $1,000.
D) The investor may select investment A or investment B depending on the opportunity cost of money.

Question

An investor is considering two equally risky investments.Investment A is expected to return $1,000 per year for the next 5 years.Investment B is expected to return $6,000 at the end of 5 years.Which of the following statements is most correct if both investments A and B have the same cost?
A) A risk averse investor will select investment B because it is expected to provide the most cash ($6,000 > $5,000).
B) A risk averse investor will select investment A because it provides cash earlier than investment B.
C) The investor will select investment A only if the cost is less than $1,000.
D) The investor may select investment A or investment B depending on the opportunity cost of money.

Quizplus · Accepted Answer

The decision on which investment to choose depends on the opportunity cost of money, which is influenced by factors such as interest rates, inflation, and alternative investment opportunities. If the opportunity cost of money is low or if there are no alternative investments with higher returns, the investor may choose investment A as it provides cash earlier. However, if the opportunity cost of money is high or if there are alternative investments with higher returns, the investor may choose investment B as it provides a higher total return over time. Therefore, the investor may select investment A or B depending on the opportunity cost of money.

An Investor Is Considering Two Equally Risky Investments