Question

Suppose Maria prefers to buy a bond with a​ 7% expected return and​ 2% standard deviation of its expected​ return, while Jennifer prefers to buy a bond with a​ 4% expected return and​ 1% standard deviation of its expected return.Can you tell if Maria is more or less​ risk-averse than​ Jennifer?
A.Maria is less​ risk-averse than Jennifer because Maria is choosing a bond with higher standard deviation.
B.Maria is more​ risk-averse than Jennifer because Maria is choosing a bond with lower volatility of its expected return.
C.There is not enough information to tell. In order to decide whether Maria or Jennifer is more risk​ averse, one will need to compare two bonds with the same expected return and different standard deviations of their expected returns.

Answer 1

Answer: The correct answer is "A.Maria is less​ risk-averse than Jennifer because Maria is choosing a bond with higher standard deviation.".

Explanation: We can measure the risk according to the standard deviation of its expected return, therefore: Maria is less risk averse because she is willing to take more risk in order to obtain a higher return and Jennifer instead prefers to sacrifice performance in order to be less exposed to risk.