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:

Negative Reinforcement

A behavioral principle where the removal of an undesirable or negative outcome or stimulus strengthens or increases the likelihood of a particular behavior.

Aversive Punishment

A type of behavior modification that involves the use of unpleasant stimuli to decrease the likelihood of a behavior being repeated.

Positive Reinforcer

A stimulus that, when presented after a behavior, increases the likelihood of that behavior being repeated.

Positive Reinforcement

A concept in behavioral psychology where a behavior is encouraged by rewarding it, thereby increasing the likelihood of its recurrence.