Investment a Has an Expected Return of 14% with a Standard

question 147

Multiple Choice

Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,

• A) a risk averse investor will definitely select investment A because the standard deviation is lower.
• B) a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%).
• C) it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big.
• D) rational investors could pick either A or B, depending on their level of risk aversion.

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Definitions:

Withdrawals

The act of removing funds from a bank account or investment vehicle.

Compounded Quarterly

An interest calculation method where interest is added to the principal sum of a deposit or loan on a quarterly basis, leading to interest earning interest.

Present Value

The present worth of a future amount of money or series of cash inflows based on a certain return rate.

Retirement Annuities

Financial products that provide a stream of payments to individuals after retirement, typically funded through premiums paid over time.