Question

Stock A has an expected return of 15 percent and the standard deviation of its returns is 20 percent. Stock B has an expected return of 10 percent and the standard deviation of its returns is 30 percent. Which stock would the risk averse investor choose to purchase?

Answer 1

Stock A will be preferable for the risk averse Investors.

Step-by-step explanation:

The reason is that risk is the measure of the vulnerability of the returns on the investment made which means if the return on the investment has greater vulnerability of returns then it is highly risky. So the risk averse investor would prefer stock A with lower risk.

(Special comments:

It must be noted that the higher return shows that the investment is also highly risky because nobody is going to give you more with low risk associated investments. This means lower return on Stock B is also preferable here for the risk averse investor because it carries lower risks.)