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    standard deviation

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    Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore, ________.

    a. a risk averse investor will definitely select investment A because the standard deviation is lower
    b. a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%)
    c. it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big
    d. rational investors could pick either A or B, depending on their level of risk aversion

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    Solution Preview

    The obvious answer is A. A lower standard deviation means that the security or stock is less risky than others. A risk ...