Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and .

A. asset A

B. asset B

C. no risky asset

D. The answer cannot be determined from the data given.

Asset A

Explanation: A risk averse investor may be described as an individual who is always trying to avoid making vague investments. Investments in which the risks is obscure and one can only guess. Such individual will opt for assets or investments with offers lower returns than those with higher profit or returns as long as the inherent risks are known.

Asset A has a lower expected return of 15% than Asset B which boast a 20% return. However with a reward-variability ratio of 0.4 , Assets A has a better risk adjusted performance than Asset B with a ratio of 0.3. Therefore, A risk averse investor will go for Asset A with better known risk.