Question

Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 13 percent. Which asset would a rational investor choose?

Multiple choice question.

Asset B


Asset A


Neither Asset A nor B since they are both risky


Either Asset A or B since they both offer the same expected return.

Answer 1

To determine which asset a rational investor would choose, we should consider the risk (standard deviation) associated with each asset relative to their expected return.

- **Asset A**:
- Expected Return: 10%
- Standard Deviation: 12%

- **Asset B**:
- Expected Return: 10%
- Standard Deviation: 13%

A rational investor typically seeks to maximize return for a given level of risk or minimize risk for a given level of return. In this case, both assets have the same expected return of 10%. However, Asset A has a lower standard deviation (risk) compared to Asset B.

Since Asset A offers the same expected return but with less risk, a rational investor would prefer Asset A over Asset B.

Therefore, the correct choice is:

**Asset A**.