AAFM Exam GLO_CWM_LVL_1 Topic 1 Question 99 Discussion

Actual exam question for AAFM's GLO_CWM_LVL_1 exam

Question #: 99
Topic #: 1

A Treasury bill pays a 6% rate of return. A risk averse investor __________ invest in a risky portfolio that pays 12% with a probability of 40% or 2% with a probability of 60% because __________.

AMight; she is rewarded a risk premium

BWould not; because she is not rewarded any risk premium

CWould not; because the risk premium is small

DCannot be determined

Show Suggested Answer

Suggested Answer: C

by Rima at Feb 10, 2025, 12:33 AM

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Temeka

1 months ago

Ah, the age-old question of risk and reward. As a risk-averse investor, I'd take the 6% Treasury bill any day. No need to chase those crazy high-risk, high-reward investments. Boring is beautiful!

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An

14 days ago

I agree, sticking with the Treasury bill is the safe choice.

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Peggie

2 months ago

D? Really? How can we not determine the answer? It's clearly a choice between B and C. I need to brush up on my risk-return concepts.

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Rolland

17 days ago

C: D? Really? How can we not determine the answer? It's clearly a choice between B and C. I need to brush up on my risk-return concepts.

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Cory

29 days ago

B: C) Would not; because the risk premium is small

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France

1 months ago

A: B) Would not; because she is not rewarded any risk premium

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Providencia

2 months ago

I agree with Alease. The key here is that the investor is risk-averse, so they're not going to take on that level of risk without a substantial risk premium. B is the correct answer.

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Werner

17 days ago

A: I agree with B. The risk premium is crucial for a risk-averse investor.

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Vivan

19 days ago

B: Would not; because she is not rewarded any risk premium

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Paris

1 months ago

A: Might; she is rewarded a risk premium

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Catarina

2 months ago

Hmm, I'm not so sure. The risk premium might be small, but the potential upside of 12% seems enticing. I'm leaning towards C.

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Tyisha

20 days ago

Yeah, the risk of losing money in the risky portfolio might not be worth the extra 6% potential return.

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Stephane

1 months ago

B: Would not; because she is not rewarded any risk premium

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Jonell

1 months ago

It's better to stick with the Treasury bill and guarantee a 6% rate of return.

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Stephanie

1 months ago

A: Might; she is rewarded a risk premium

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Beula

1 months ago

I agree, the risk premium might not be enough to justify the higher return of the risky portfolio.

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Erick

1 months ago

Investing in the risky portfolio might not be worth it, even with the potential upside of 12%.

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Alease

2 months ago

I think the answer is B. The risk-averse investor would not invest in the risky portfolio because she is not being rewarded for the additional risk.

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Craig

2 months ago

But what if the risk premium is small? Would that change the investor's decision?

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Ceola

3 months ago

I agree with Ressie. The risk premium is important for risk averse investors to consider before making investment decisions.

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Ressie

3 months ago

I think a risk averse investor would not invest in a risky portfolio that pays 12% with a probability of 40% or 2% with a probability of 60% because she is not rewarded any risk premium.

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