Author Question: If two investments have the same level of risk, a rational investor will choose the investment with ... (Read 103 times)

roselinechinyere27m · **on:** Jul 10, 2018

If two investments have the same level of risk, a rational investor will choose the investment with the higher expected rate of return.

Indicate whether the statement is true or false.

Question 2

What are the two investment rules identified in the text? Evaluate the validity of the following statement and justify your reasoning. Investors do not like risk and will always choose the investment with the least risk.

What will be an ideal response?

janeli · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: TRUE

Answer to Question 2

Answer: The two rules identified by the author are: 1. If two investments have the same expected return and different levels of risk, the investment with the lower risk is preferred. 2. If two investments have equal risk, the investment with the higher expected return is preferred.

As for the statement, it is true that investors don't like risk to the extent that they do not willingly accept greater risk without increased expected return. That does not imply that investors will always choose the investment with the least amount of risk. An investor may choose an investment with greater risk if the reward-to-risk trade-off is favorable.