Question

Asset X Asset Y

P k P k

0.10 -3% 0.05 -3%

0.10 2 0.10 2

0.25 5 0.30 5

0.25 8 0.30 8

0.30 10 0.25 10

Which asset should be preferred? Explain why.

Assume that a new law is passed which restricts investors to holding only one asset. A risk-averse investor is considering two possible assets as the asset to be held in isolation. The assets' possible returns and related probabilities (i.e., the probability distributions) are as follows:

Asset X Asset Y

P k P k

0.10 -3% 0.05 -3%

0.10 2 0.10 2

0.25 5 0.30 5

0.25 8 0.30 8

0.30 10 0.25 10

Which asset should be preferred? Explain why.