It is typically easy to determine a precise mix of optimal debt and equity.
Indicate whether the statement is true or false
Question 2
Investment A has an expected return of 14 with a standard deviation of 4, while investment B
has an expected return of 20 with a standard deviation of 9. Therefore,
A) rational investors could pick either A or B, depending on their level of risk aversion.
B) a rational investor will pick investment B because the return adjusted for risk (20 - 9) is
higher than the return adjusted for risk for investment A (14 - 4).
C) a risk averse investor will definitely select investment A because the standard deviation is
lower.
D) it is irrational for a risk-averse investor to select investment B because its standard deviation
is more than twice as big as investment A's, but the return is not twice as big.
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