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?

Possible Answers

Distribution A.
Distribution B.
Distribution C.

Exercise

Balancing risk and reward

Instructions

Possible Answers