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Which of the following investments would be most attractive to a risk-averse investor? Investment A Expected Value 50 55 Standard Deviation 5 B 5 C 55 7 O A risk-averse investor will prefer investment C because it has the highest expected value and standard deviation
Which of the following investments would be most attractive to a risk-averse investor? Investment A Expected Value 50 55 Standard Deviation 5 B 5 C 55 7 O A risk-averse investor will prefer investment C because it has the highest expected value and standard deviation. O A risk-averse investor would be indifferent between investments B and C and prefer them to investment A because they have a higher expected value. O A risk-averse investor will prefer investment B because it has a higher expected return than investment A for the same level of risk and the same expected return as investment C for a lower level of risk. O A risk-averse investor would prefer investment A because it has the lowest expected value. How would your answer differ if the investor were described as risk-neutral? O A risk-neutral investor would prefer investment A because it has the lowest expected value. O A risk-neutral investor would be indifferent between investments B and C and prefer them to investment A because they have a higher expected value. O A risk-neutral investor will prefer investment C because it has the highest expected value and standard deviation. O A risk-neutral investor will prefer investment B because it has a higher expected return than investment A for the same level of risk and the same expected return as investment C for a lower level of risk.
Expert Solution
Solution:
a) A risk averse individual is the one who avoids risk, in the sense the variation in payoffs should be least. In given cases, both A and B have same variation of payoffs which is also lower than that for C, with B generating a higher payoff. So, a risk averse individual would prefer alternative B.
Thus, the correct option is (c).
b) For a risk neutral individual, variation doesn't matter, the amount of expected payoff matters only, so always the highest expected payoff generating alternative would be chosen.
Thus, the correct option is (b).
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