If Two Assets Have the Same Expected Rate of Return

question 16

True/False

If two assets have the same expected rate of return but different variances, a risk-averse investor should always choose the one with the smaller variance, no matter what other assets she holds.

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Definitions:

Inefficiency

Occurs when resources are not used in the most effective way, resulting in wasted resources or lost opportunities, often identified in markets with monopolies or restrictive trade practices.

Imperfectly Competitive Industry

A market structure characterized by a few producers that have some control over the price and where products are differentiated.

Control Over Price

The ability of a person or entity to influence the market price of a product or service.

Individual Producer

A single entity or person that creates goods or provides services in an economy.