In which of the following situations would an investor be most risk averse?
A) When allocating assets to stocks, bonds, and other assets. B) When allocating funds to active equity managers. C) When allocating funds to a passive index.
C is my guess
B
The answer would have to be ©.
* Risk averse investor prefers lower returns with known risks – rather than higher returns with unknown risks.
* While (A) seems appropriate from a diversification standpoint, you would obviously be taking some “chances” by investing in a range of different asset classes that have different correlations to one another.
* And (B) is obviously out since active equity managers are seeking higher returns by taking additional risks.
* In this case, the risk averse investors settles for © passive index returns by NOT assuming any unknown (i.e., unsystematic) risk in the marketplace.
B (After reading the answer it made more sense)
Investors are more risk adverse with active strategies esp if they answer to a higher power (ie- a committee). This is b/c they assume that certain managers can add value, and that they have the ability to select/ find/ hire those managers. The committee will judge their results against a passive index and investment staff will be held responsible of the return (after management fees) if not above the passive index. Therefore, investors are more risk adverse (cautious) with active management strategies.
totally weird question - i guess it’s from qbank?
yes it is… answer is active management… thanks guys