Investment A has an expected return of 14% with a standard deviation o

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) rational investors could pick either A or B, depending on their level of risk aversion.
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) a risk averse investor will definitely select investment A because the standard deviation is
lower.
D) 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.

ANSWER

A