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Basic Question 4 of 16
If a T-bill pays 5 percent, which of the following investments would not be chosen by a risk-averse investor?
B) An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60
C) An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability of 0.80
A. An asset that pays 10 percent with a probability of 0.60 or 2 percent with a probability of 0.40
B) An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60
C) An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability of 0.80
User Contributed Comments 3
| User | Comment |
|---|---|
| rjh512 | why would a risk-averse investor choose an investment that gets a lower return than the t-bill? Shouldn't all 3 be incorrect? |
| vadfir | high probability of getting 3.75%, whereas T-Bill are more likely (guaranteed) 5% |
| Corey678 | @rjh512, The probability of a higher return would induce the investor to take on the asset. 10% > 5% (T Bill).The best situation is A, but the question is what the investor would not choose. |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
explain risk aversion and its implications for portfolio selection
CFA® 2024 Level I Curriculum, Volume 2, Module 1.