Investments a and B Both Offer an Expected Rate of Return

question 45

Multiple Choice

Investments A and B both offer an expected rate of return of 12%. If the standard deviation of A is 20% and that of B is 30%, then investors would:

• A) Prefer A to B
• B) Prefer B to A
• C) Prefer a portfolio of A and B
• D) Cannot answer without knowing investor's risk preferences

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Definitions:

Corporations

A business firm owned by shareholders who possess ownership rights to the firm’s profits, but whose liability is limited to the amount of their investment in the firm.

Partnerships

A legal form of business operation between two or more individuals who share management and profits.

Principal-Agent Problem

A dilemma in economics occurring when one party (the agent) is able to make decisions and/or take actions on behalf of, or that impact, another party (the principal).

Profit-Sharing Plans

A company program that gives employees a share in the profits of the company.