Consider Three Investments, Where Expected Return Is the Expected Value $\quad$

question 89

Multiple Choice

Consider three investments, where expected return is the expected value of the total return and risk is measured by the standard deviation.The investments are identical in every way except for their expected return and risk:
Investment A: $\quad$ expected return = 2 percent, risk = 5 percent
Investment B: $\quad$ expected return = 5 percent, risk = 4 percent
Investment C: $\quad$ expected return = 14 percent, risk = 20 percent
Investment D $\quad$ expected return = 6 percent, risk = 12 percent

If a risk-averse investor can buy only one of the three investments and compares each investment with the other three, which investment option would he never choose?

• A)Investment A, because its expected return is lower than Investment B and its risk is higher.
• B)Investment B, because its expected return is so much lower than Investment C.
• C)Investment C, because its risk exceeds its expected return.
• D)Investments D, because the expected return to investment D is so much lower than Investment C.

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Definitions:

Pleasant Stimulus

An external factor that induces a positive emotional response or feeling of pleasure.

Positive Reinforcer

A stimulus when presented after a response increases the probability of that response being repeated, by providing a desirable effect or satisfying a need.

Negative Reinforcer

An unpleasant stimulus that, when removed after a behavior, increases the likelihood of that behavior being repeated.

Partial Reinforcement

is a conditioning principle where a response is reinforced only a portion of the time, which can lead to a slower acquisition of a response but greater resistance to extinction.