A Highly Risk-Averse Investor Is Considering the Addition of an Asset

question 94

Multiple Choice

A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio.The two securities under consideration both have an expected return equal to 15 percent.However,the distribution of possible returns associated with Asset A has a standard deviation of 12 percent,while Asset B's standard deviation is 8 percent.Both assets are correlated with the market with ρ = 0.75.Which asset should the risk-averse investor add to his/her portfolio?

• A) Asset A.
• B) Asset B.
• C) Both A and B.
• D) Neither A nor B.
• E) Cannot tell without more information.

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Definitions:

Nonzero Differences

Variations or disparities in data that are distinct from zero, indicating a measurable change or effect.

Parametric T-Test

A statistical test used to compare the means of two samples, assuming that the underlying populations have a normal distribution and known variance.

Nonparametric Counterpart

A type of statistical method that does not assume a specific distribution for the data, often used when the data doesn't meet the assumptions of parametric tests.

Matched Pairs

A study design in which subjects are paired based on certain characteristics, with one subject in each pair receiving each treatment.