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Question
Assume that a new law is passed which restricts investors to holding only one asset. A risk-averse investor is considering two possible assets as the asset to be held in isolation. The assets' possible returns and related probabilities (i.e., the probability distributions) are as follows:
Asset X Asset Y
Pr r Pr r
10 −3% 05 −3%
10 2 10 2
25 5 30 5
25 8 30 8
30 10 25 10
Which asset should be preferred?
a. Asset X, since its expected return is higher.
b. Asset Y, since its beta is probably lower.
c. Either one, since the expected returns are the same.
d. Asset X, since its standard deviation is lower.
e. Asset Y, since its coefficient of variation is lower and its expected return is higher.
Answer
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