Risk aversion means that if two assets have identical expected returns, an individual will choose the asset with the: A)
| higher standard deviation. |
| B)
| shorter payback period. |
| |
Investors are risk averse.
Given a choice between assets with equal rates of expected return, the investor will always select the asset with the lowest level of risk.
This means that there is a positive relationship between expected returns (ER) and expected risk (Es) and the risk return line (capital market line [CML] and security market line [SML]) is upward sloping. Standard deviation is a way to quantify risk. The payback period is used to evaluate capital projects, not investment returns. |