Security A will yield a 6% return in one year. Security B will either yield a 3% return or a 9% return in year with equal probability. Which is the better investment based on risk aversion and why?
A)Security A, because it has a higher expected return with less risk.
B)Security B, because it has a higher expected return with less risk.
C)Security A, because it has an equivalent expected return with less risk.
D)Security B, because it may potentially produce a 9% return.

Question

Quizplus · Accepted Answer

When comparing investments, it is important to consider both the expected return and the level of risk involved. In this case, Security A has a guaranteed return of 6%, while Security B has an expected return of 6% (the average of 3% and 9%) with equal probability. However, Security B has a higher level of risk since there is a chance it may only yield 3%. Therefore, for someone who is risk averse, Security A would be the better investment choice because it has an equivalent expected return with less risk.

Security a Will Yield a 6% Return in One Year