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June 16 shoe Co, 5th question.
Return is maximised irrespective of level of risk .
Return is maximised for given level of risk
Risk is minimised irrespective of level of return
Risk is minimised for set level of return. Which is true regarding ev?
Options 3 and 4 is wrong as risk is never minimised for ev as we can only ascertain probabilities. Can u explain teh first two options and which is correct
I cannot help you without seeing the whole question.
What you are asking was not part of the original exam question – wherever you found this they must have altered it.
Sorry John, Q is out of the statements given which is true regarding Expected values
As I explain in my free lecture on this, the expected value criterion is risk neutral – i.e. it takes no account of the risk.
Suppose one option gave either 50 or 150, and another option gave either 90 or 110. In both cases the probabilities of each are 0.5.
Both options would have the same expected value of 100 and we would be indifferent between them. However the first option is more risky because the actual return may be a lot higher or a lot lower than the second option.
Therefore the correct answer is the first of the four options.
I do suggest that you watch my lectures – they are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.
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