You are going to invest all of your funds in one of three projects with the following distribution of possible returns: Project 1 Project 2
Standard Deviation 12% Standard Deviation 19.5%
Probability Return Probability Return
50% Chance 20% 30% Chance 30%
50% Chance -4% 40% Chance 10%
30% Chance -20%
Project 3
Standard Deviation 12%
Probability Return
10% Chance 30%
40% Chance 15%
40% Chance 10%
10% Chance -21%
If you are a risk-averse investor, which one should you choose?
A) Project 1
B) Project 2
C) Project 3
D) None of the above

Question

Quizplus · Accepted Answer

Project 3 has the lowest standard deviation at 12%, which means it has the lowest overall risk. Additionally, it has more conservative returns with a potential for a 10% return for 80% of the probabilities. As a risk-averse investor, choosing a project with lower risk and more conservative returns is the best choice.

You Are Going to Invest All of Your Funds in One