What are the two investment rules identified in the text? Evaluate the

What are the two investment rules identified in the text? Evaluate the validity of the following statement and justify your reasoning. “Investors do not like risk and will always choose the investment with the least risk.”

What will be an ideal response?

ANSWER

Answer: The two rules identified by the author are: 1. If two investments have the same expected return and different levels of risk, the investment with the lower risk is preferred. 2. If two investments have equal risk, the investment with the higher expected return is preferred.

As for the statement, it is true that investors “don’t like risk” to the extent that they do not willingly accept greater risk without increased expected return. That does not imply that investors will always choose the investment with the least amount of risk. An investor may choose an investment with greater risk if the reward-to-risk trade-off is favorable.