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  3. Introduction to Portfolio Analysis in R

Exercise

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 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?

Instructions

50 XP

Possible answers