- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 1. Portfolio Risk and Return: Part I
- Subject 2. Risk Aversion and Portfolio Selection
CFA Practice Question
If a T-bill pays 5 percent, which of the following investments would not be chosen by a risk-averse investor?
B) An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60
C) An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability of 0.80
A. An asset that pays 10 percent with a probability of 0.60 or 2 percent with a probability of 0.40
B) An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60
C) An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability of 0.80
Correct Answer: C
The expected return from C is 0.1 x 0.2 + 0.0375 x 0.8 = 5%. A risk-averse investor will choose a T-bill instead.
User Contributed Comments 3
| User | Comment |
|---|---|
| rjh512 | why would a risk-averse investor choose an investment that gets a lower return than the t-bill? Shouldn't all 3 be incorrect? |
| vadfir | high probability of getting 3.75%, whereas T-Bill are more likely (guaranteed) 5% |
| Corey678 | @rjh512, The probability of a higher return would induce the investor to take on the asset. 10% > 5% (T Bill).The best situation is A, but the question is what the investor would not choose. |