Question

Which investment would you select if you were risk neutral?

Answer 1

Here, the investor is risk-neutral.

A=0

Thus, U = E(r).

We have the requisite information to answer the question, hence option E is eliminated.

Investment Mean Return Std Dev U

1 0.12           0.3                   0.12

2 0.15      0.5                  0.15

3 0.21        0.16                0.21

4 0.24 0.21               0.24

Thus, it can be seen that investment 4 given the maximum utility, and is thus the selected investment for a risk neutral investor. Thus, option D.

What options does a risk-averse individual select?

• When someone is considering different investment options, they are said to have a risk-neutral mentality.
• One is considered to be risk neutral if they just consider possible profits, regardless of the danger.
• To assess profit without considering risk may look like a dangerous behavior by nature.

Learn more about risk-neutral person

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The complete question is -

Use the below information to answer the following question Investment WN - Expected Return E() 0.12 0.15 0.21 0.24 Standard Deviation 0.3 0.5 0.16 0.21 U= E(r)-(A/2)s2 Which investment would you select if you were risk neutral? A. 1 B.2 C. 3 D. 4 E. Cannot be determined from the information given. If you are risk neutral, your only concern is with return, not risk.