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AAFM GLO_CWM_LVL_1 Exam - Topic 1 Question 99 Discussion

A Treasury bill pays a 6% rate of return. A risk averse investor __________ invest in a risky portfolio that pays 12% with a probability of 40% or 2% with a probability of 60% because __________.
C) Would not; because the risk premium is small
A) Might; she is rewarded a risk premium
B) Would not; because she is not rewarded any risk premium
D) Cannot be determined

AAFM GLO_CWM_LVL_1 Exam - Topic 1 Question 99 Discussion

Actual exam question for AAFM's GLO_CWM_LVL_1 exam
Question #: 99
Topic #: 1
[All GLO_CWM_LVL_1 Questions]

A Treasury bill pays a 6% rate of return. A risk averse investor __________ invest in a risky portfolio that pays 12% with a probability of 40% or 2% with a probability of 60% because __________.

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Suggested Answer: C

by Rima at Feb 10, 2025, 12:33 AM

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Merilyn
9 months ago
But what if the market changes? Can't be so sure!
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Malcom
10 months ago
I think option B makes the most sense here.
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Simona
10 months ago
Wait, a 12% return sounds tempting, but is it really worth the risk?
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Elli
10 months ago
Totally agree, risk averse investors won't go for that.
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Essie
10 months ago
A Treasury bill is safer than a risky portfolio.
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Avery
11 months ago
I'm torn between B and C; I know the risk premium is important, but I can't recall if it's considered small or just not rewarding enough.
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Isaiah
11 months ago
I practiced a similar question about risk and return, and I feel like the risk premium here isn't compelling enough for a risk averse investor.
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Gilbert
11 months ago
I think the answer might be B because a risk averse investor typically avoids risky portfolios unless the premium is significant.
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Adaline
11 months ago
I remember studying risk aversion and how it affects investment choices, but I'm not sure if the risk premium is enough in this case.
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Elise
11 months ago
Alright, I think I've got this. A risk-averse investor would not invest in the risky portfolio because the risk premium is not high enough to compensate for the additional risk. The 6% return on the Treasury bill is the safer choice.
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Emmett
11 months ago
I'm a bit confused on this one. The question is asking about a risk-averse investor, but the risky portfolio has a higher expected return. I'll need to review my notes on risk aversion and portfolio selection to figure this out.
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Rossana
11 months ago
Okay, let me see. The Treasury bill has a 6% return, while the risky portfolio has a 40% chance of 12% and a 60% chance of 2%. I think the key is whether the risk premium is worth it for a risk-averse investor.
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Joanna
11 months ago
Hmm, this seems like a tricky one. I'll need to think through the risk-return tradeoff and the concept of risk premium to determine the best answer.
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Temeka
1 year ago
Ah, the age-old question of risk and reward. As a risk-averse investor, I'd take the 6% Treasury bill any day. No need to chase those crazy high-risk, high-reward investments. Boring is beautiful!
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Gladys
1 year ago
I'd rather play it safe and go for the guaranteed 6% return.
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Bettina
1 year ago
I think the risk premium is not worth it for the risky portfolio.
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An
1 year ago
I agree, sticking with the Treasury bill is the safe choice.
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Peggie
1 year ago
D? Really? How can we not determine the answer? It's clearly a choice between B and C. I need to brush up on my risk-return concepts.
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Rolland
1 year ago
C: D? Really? How can we not determine the answer? It's clearly a choice between B and C. I need to brush up on my risk-return concepts.
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Cory
1 year ago
B: C) Would not; because the risk premium is small
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France
1 year ago
A: B) Would not; because she is not rewarded any risk premium
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Providencia
1 year ago
I agree with Alease. The key here is that the investor is risk-averse, so they're not going to take on that level of risk without a substantial risk premium. B is the correct answer.
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Werner
1 year ago
A: I agree with B. The risk premium is crucial for a risk-averse investor.
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Vivan
1 year ago
B: Would not; because she is not rewarded any risk premium
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Paris
1 year ago
A: Might; she is rewarded a risk premium
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Catarina
1 year ago
Hmm, I'm not so sure. The risk premium might be small, but the potential upside of 12% seems enticing. I'm leaning towards C.
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Tyisha
1 year ago
Yeah, the risk of losing money in the risky portfolio might not be worth the extra 6% potential return.
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Stephane
1 year ago
B: Would not; because she is not rewarded any risk premium
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Jonell
1 year ago
It's better to stick with the Treasury bill and guarantee a 6% rate of return.
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Stephanie
1 year ago
A: Might; she is rewarded a risk premium
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Beula
1 year ago
I agree, the risk premium might not be enough to justify the higher return of the risky portfolio.
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Erick
1 year ago
Investing in the risky portfolio might not be worth it, even with the potential upside of 12%.
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Alease
1 year ago
I think the answer is B. The risk-averse investor would not invest in the risky portfolio because she is not being rewarded for the additional risk.
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Craig
1 year ago
But what if the risk premium is small? Would that change the investor's decision?
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Ceola
1 year ago
I agree with Ressie. The risk premium is important for risk averse investors to consider before making investment decisions.
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Ressie
1 year ago
I think a risk averse investor would not invest in a risky portfolio that pays 12% with a probability of 40% or 2% with a probability of 60% because she is not rewarded any risk premium.
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