Question

Asset A has an expected return of 15% and a reward-to-variability ratio of 0.4. Asset B has an expected return of 20% and a reward-to-variability ratio of 0.3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

Answer 1

Answer: Asset A

Explanation:

The risk-averse investor will prefer the asset that has a lesser standard deviation because it indicates less risk.

Reward-to-variability ratio = Expected return/ standard deviation

Standard deviation = Expected return /  reward-to-variability ratio

Asset A deviation = 0.15/0.4 = 0. 375

Asset B deviation = 0.2/0.3 = 0.667

Risk Averse investor will pick Asset A with the lesser deviation.