Suppose Maria prefers to buy a bond with a 7% expected return and 2% standard deviation of its expected return, while Jennifer prefers to buy a bond with a 4% expected return and 1% standard deviation of its expected return. Can you tell if Maria is more or less risk-averse than Jennifer?

A. Maria is less risk-averse than Jennifer because Maria is choosing a bond with higher standard deviation.

B. Maria is more risk-averse than Jennifer because Maria is choosing a bond with lower volatility of its expected return.

C. There is not enough information to tell. In order to decide whether Maria or Jennifer is more risk averse, one will need to compare two bonds with the same expected return and different standard deviations of their expected returns.

Question

Ethen Nolan

Business

10 November, 14:26

Suppose Maria prefers to buy a bond with a 7% expected return and 2% standard deviation of its expected return, while Jennifer prefers to buy a bond with a 4% expected return and 1% standard deviation of its expected return. Can you tell if Maria is more or less risk-averse than Jennifer?

A. Maria is less risk-averse than Jennifer because Maria is choosing a bond with higher standard deviation.

B. Maria is more risk-averse than Jennifer because Maria is choosing a bond with lower volatility of its expected return.

C. There is not enough information to tell. In order to decide whether Maria or Jennifer is more risk averse, one will need to compare two bonds with the same expected return and different standard deviations of their expected returns.

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Answers (1)

Know the Answer?

Drake Woodward · Answer 1

Answer: The correct answer is "A. Maria is less risk-averse than Jennifer because Maria is choosing a bond with higher standard deviation.".

Explanation: We can measure the risk according to the standard deviation of its expected return, therefore: Maria is less risk averse because she is willing to take more risk in order to obtain a higher return and Jennifer instead prefers to sacrifice performance in order to be less exposed to risk.