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:

Mania

A mental state characterized by extremely elevated mood, energy, and unusual thought patterns, often seen in bipolar disorder.

Negative Mood

A general, enduring state of mind characterized by negative emotions such as sadness, anxiety, or irritability.

Critical Thinking

Thinking that does not blindly accept arguments and conclusions. Rather, it examines assumptions, appraises the source, discerns hidden biases, evaluates evidence, and assesses conclusions.

DSM-5

The fifth edition of the Diagnostic and Statistical Manual of Mental Disorders, which is a standardized classification of mental disorders used by mental health professionals in the U.S.