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:

Class

A set of entities, instances, or objects sharing common attributes, properties, or characteristics.

Inferential Statistics

The branch of statistics that allows drawing conclusions and making predictions about a population based on a sample of data.

Numerical Information

Data that is quantifiable and can be used for mathematical calculations and statistical analysis.

Experimental Units

The smallest division of participants or items in an experiment that can receive different treatments.