Question

We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB. a. True b. False

Answer 1

Answer: False

Explanation:

First calculate the expected value for both securities:

Security AA:

= (0.2 * 30%) + (0.6 * 10%) + (0.2 * -5%)

= 6% + 6% + (-1%)

= 11%

Security BB

= (0.2 * -10%) + (0.6 * 5%) + (0.2 * 50%)

= -2% + 3% + 10%

= 11%

They both have the same expected return so the investor will be indifferent. Statement is therefore false.