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Three investors Jen, Sarah and Matt are considering two investments A & B. Investment A is the less risky of the two investments, requiring an outlay of $5,000 with an expected rate of return at 12%. Each investor is satisfied with this expected return. Investment B also requires an investment of $5,000 and has an expected return of 12% but appears to have considerably more variability in potential returns compared with A. Jen now requires a return of 16%, Sarah is still satisfied with 12% and Matt seeks only an 8% expected return. Given the information above, which of the three investors, would be considered risk-averse?
Correct Answer: A
Only Jen would be considered risk-averse. She is the only investor that demands a risk-premium to entice her into this riskier venture. Sarah would be considered risk-neutral as she is content with the same rate of return despite the higher risk levels and Matt would be considered a risk seeker as he is demanding a return that is less than the return offered for a lower risk investment.