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r r Assume that a new regulation restricts investors to holding only one asset. A risk averse investor is considering the following two possible assets:

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r r Assume that a new regulation restricts investors to holding only one asset. A risk averse investor is considering the following two possible assets: Asset X Asset Y Prob Prob 0.1 -3% 0.05 -3% 0.1 2% 0.1 1% 0.25 5% 0.3 4% 0.25 8% 0.3 8% 0.3 10% 0.25 10% Asset X has a beta of 0.5 and the beta of asset Y is 1.2. Standard deviation of Asset X is 3.97%, while that of Asset Y is 3.6%. The risk free rate is 4%. Which asset should he prefer? A) Asset X, since its beta is lower. B) Asset Y because its expected risk (standard deviation) is lower. C) Asset X because the ratio of its reward (expected return minus the risk free rate) to beta risk is higher. D) Asset Y because the ratio of its reward (expected return minus the risk free rate) to standard deviation risk is higher. E) None of the above

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