Consider four investments, where risk is measured by the standard deviation. The investments are identical in every way except for their expected return and risk:
Investment A:expected return = 2 percent, risk = 5 percentInvestment B:expected return = 5 percent, risk = 4 percentInvestment C:expected return = 14 percent, risk = 20 percentInvestment Dexpected return = 6 percent, risk = 12 percent
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If a risk-averse investor can buy only one of the four investments and compares each investment with the other three, which investment option would he never choose?
A. Investment A, because its expected return is lower than Investment B and its risk is higher.
B. Investment B, because its expected return is so much lower than Investment C.
C. Investment C, because its risk exceeds its expected return.
D. Investments D, because the expected return to investment D is so much lower than Investment C.
Answer: A
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