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Chapter 5: Q.7 (page 164)

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?

Short Answer

Expert verified

Maria has taken more chances than Jennifer.

Step by step solution

01

Introduction

A standard deviation is a measure of how much data deviates from its mean; the higher the standard deviation, the greater the dispersion, and vice versa.

02

Explanation

Maria is less risk averse than Jennifer since he wants to buy a bond with a standard deviation of 2%, which is higher than J's (1%) standard deviation. The bigger the standard deviation, the greater the return dispersion, and thus the higher the risk of investment. As a result, M has taken more chances than J.

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