Asked by Frasier Williamson on Jul 12, 2024
Verified
Rashad is risk averse and has $3,000 with which to make a financial investment. He has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $3,307.50 in two years. Option C is a high-risk stock that is expected to be worth about $3,646.52 in four years. Rashad should choose
A) option A.
B) option B.
C) option C.
D) either A or B because they are the same to him.
Risk Averse
The preference to avoid uncertainty, expressing a behavior where individuals prefer known risks over unknown outcomes.
Financial Investment
Allocating money into an asset or a project with the expectation of generating income or profit.
Government Bond
A type of investment where an investor loans money to a government in exchange for periodic interest payments plus the return of the bond's face value at maturity.
- Compare and contrast different investment options based on their risk and return profiles.
Verified Answer
LW
Lindsey WhaleyJul 14, 2024
Final Answer :
A
Explanation :
Rashad is risk averse, meaning he prefers to avoid risk when possible. Option A, the risk-free government bond, is the most suitable choice for someone with his risk preference, as it guarantees a return without any risk.
Learning Objectives
- Compare and contrast different investment options based on their risk and return profiles.