You are going to invest all of your funds in one of three projects with the following distribution of possible returns:
Project 1 Project 2
Standard Deviation 12% Standard Deviation 19.5%
Probability Return Probability Return
50% Chance 20% 30% Chance 30%
50% Chance -4% 40% Chance 10%
30% Chance -20%
Project 3
Standard Deviation 12%
Probability Return
10% Chance 30%
40% Chance 15%
40% Chance 10%
10% Chance -21%
If you are a risk-averse investor,which one should you choose?
A)Project 1
B)Project 2
C)Project 3

Question

Quizplus · Accepted Answer

As a risk-averse investor, the best option would be to choose the project with the lowest standard deviation of returns. Among the three projects, Project 3 has the lowest standard deviation of 12% and also offers a positive expected return, thus making it the best choice. Project 1 has the same standard deviation but has a negative expected return, while Project 2 has a higher standard deviation of 19.5%, which makes it a riskier choice.

You Are Going to Invest All of Your Funds in One