Asset A has an expected return of 17 percent and standard deviation of 5 percent. Asset B has an expected return of 15 percent and standard deviation of 5 percent. Which asset would a rational investor choose

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13-07-2022
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Asset A has an expected return of 17 percent and standard deviation of 5 percent. Asset B has an expected return of 15 percent and standard deviation of 5 percent. Which asset would a rational investor choose

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sharmaaashutosh169 sharmaaashutosh169 · Answer 1 · 2022-07-20T10:25:21+02:00

Asset A would be rational to the investor.

The standard deviation indicates the asset's risk. A low standard deviation indicates that data is clustered around the mean, whereas a high standard deviation indicates that data is more dispersed.

The standard deviation is used to measures how dispersed the data is. It represents the degree to which each observed value deviates from the mean.. Furthermore, increased risk is offset by higher reward. As a result, a bigger return is required for an asset with a higher standard deviation.

Both assets have a standard deviation of 5 in this scenario, but Asset A has a larger predicted return.

As a result, a sensible investor will select Asset A since it offers a larger return with the same risk.

Thus, correct answer is option A.

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