- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 52. Portfolio Risk and Return: Part I
- Subject 4. Risk Aversion and Portfolio Selection

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**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.

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**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. |