Which of the statements below is NOT correct? 1. If two investments have the same expected return, the investment with the lower risk is preferred. 2. If two investments have the same expected return, the investment with the greater risk is preferred. 3. If two investments have the same expected risk, the investment with the higher expected return is preferred. 4. If one investment has a higher expected return and a greater level of risk than another, it is not clear which investment is the preferred choice.

Question

Business

Joselyn Yu

3 April, 18:40

Which of the statements below is NOT correct? 1. If two investments have the same expected return, the investment with the lower risk is preferred. 2. If two investments have the same expected return, the investment with the greater risk is preferred. 3. If two investments have the same expected risk, the investment with the higher expected return is preferred. 4. If one investment has a higher expected return and a greater level of risk than another, it is not clear which investment is the preferred choice.

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Jay Reid · Answer 1

2. If two investments have the same expected return, the investment with the greater risk is preferred.

Explanation:

The statement above is clearly incorrect. If two investment are expected to return the same amount of money to the investor, then, the investor will seek the investment that has a lower risk, because risk, as the meaning of the word implies, is a variable that may impede the realization of the return.

No rational economic agent or investor would choose the riskier investment in this situation.