Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to:

Question

Quizplus · Accepted Answer

Investors will assign higher weights to more likely outcomes because they have a greater chance of occurring, which makes them more important to consider in the estimation process. Higher returns and smaller returns are both important factors, but they do not necessarily carry more weight than the likelihood of each outcome. Higher risks may actually receive lower weights, as investors will likely desire a higher rate of return to compensate for the additional risk.

Investors Evaluate an Investment by Estimating Its Average Expected Rate