Question

a risk averse investor, which of the following four otherwise identical investment would you prefer? A.Security W, which exhibits a standard deviation of 2% and offers an average return of 12%. B.Security Z, which exhibits a standard deviation of 2% and offers an average return of 8%. C.Security X, which exhibits a standard deviation of 4% and offers an average return of 12%. D.Security Y, which exhibits a standard deviation of 4% and offers an average return of 8%

Answer 1

Answer:

B.Security Z, which exhibits a standard deviation of 2% and offers an average return of 8%.

Explanation:

A risk averse investor is one that prefers to invest in assets that have a predictably low return on investment and is not prone to risk.

Standard deviation of an investment measures how annual rate of return of an investment is consistent.

The lower the standard deviation the more consistent the returns of the investment over time. The higher the standard deviation the more volatile the investment.

So a risk averse investor will go for an investment with lower standard deviation of 2% and average return of 8%.