Balancing risk and reward

To the right you see three return distributions. The x-axis corresponds to the return of an asset, and the y-axis is the corresponding density, indicating how likely that return value is. Take a moment to look over these charts.

Notice that the distributions are all symmetric and the center of the distribution corresponds to the average return.

Return distributions A and B have the same expected return. But distribution B has a higher volatility and therefore has a wider range of possible outcomes. This indicates that the risk of a large deviation from the mean return is higher for investing in B than for investing in A. Distribution C has the same level of volatility as Distribution A but a higher mean return.

You're the type of investor who likes returns, but dislikes risks. Which distribution do you prefer?

Possible Answers

Distribution A.
Distribution B.
Distribution C.

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Exercise

Balancing risk and reward

Instructions

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