The following two assets and payout data are given below: Asset A : Pays a return of $2,000 20% of the time and $500 80% of the time. Asset B : Pays a return of $1,000 50% of the time and $600 50% of the time. If both assets can be acquired for the same price, as a risk-averse investor, you would prefer

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Business

Alejandro Levy

22 July, 03:46

The following two assets and payout data are given below: Asset A : Pays a return of $2,000 20% of the time and $500 80% of the time. Asset B : Pays a return of $1,000 50% of the time and $600 50% of the time. If both assets can be acquired for the same price, as a risk-averse investor, you would prefer

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Pamela Vazquez · Answer 1

I would prefer Asset B

Explanation:

A risk averse investor is the one who prefers lower amount of returns with known or specific risks instead of the higher amount of returns with unknown risks. So, from among the various level of risks, the investor will be preferring the alternative with the least interest.

So, in this case,

In Asset A: pay a return of $2,000 and at 20% of time and the $500 at 80% of time.

In Asset B: pay a return of $1,000 and at 50% of time and the $600 at 50% of time.

So, I would prefer, Asset B as it has low return but have a known risk that is of 50 - 50.