Assume That Two Investments Have a Three-Year Life and Generate

question 25

Multiple Choice

Assume that two investments have a three-year life and generate the cash flows shown below. Which of the two would you prefer? Year Investment A Investment B
1 $5,000 $8,000
2 $5,000 $5,000
3 $5,000 $2,000

• A) Investment A, since it has the most even cash flows
• B) Investment B, since it gives you the largest cash flows in earlier years
• C) Neither, since they both have equal lives
• D) Both investments are equally attractive

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Definitions:

Risk-free Asset

An investment with a guaranteed return and no risk of financial loss, often exemplified by government bonds.

Adequately Diversified

A portfolio strategy minimizing risk by investing in a wide variety of assets, ensuring that the performance of one investment does not dramatically impact overall portfolio performance.

Portfolio's Beta

A measure of the volatility, or systemic risk, of a portfolio in comparison to the market as a whole.

Standard Deviation

A measure of the dispersion or variation in a distribution or set of data, widely used in statistics to gauge the volatility of financial returns.