CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

If a T-bill pays 5 percent, which of the following investments would not be chosen by a risk-averse investor?

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.
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