ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Choose an investment with a high standard deviation but a low expected return.
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Choose an investment with a low standard deviation and a high expected return.
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Choose an investment with a high expected return and a high standard deviation.
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Choose an investment with a low standard deviation and a low expected return.
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Detailed explanation-1: -Which of the following statements regarding risk-averse investors is true? They only accept risky investments that offer risk premiums over the risk-free rate.
Detailed explanation-2: -Risk averse investors tend to favor capital preservation over capital gains and seek out more conservative investments than more risk-seeking individuals. Such investments may include savings products, CDs, highly-rated bonds, and blue-chip stocks.
Detailed explanation-3: -Definition: A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. In other words, among various investments giving the same return with different level of risks, this investor always prefers the alternative with least interest.
Detailed explanation-4: -The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.