A risk-averse investor has a choice between three investments:A, B, and C. The expected return...

A risk-averse investor has a choice between three investments: A, B, and C. The expected return is the same for all three, as is the variance. The returns of the three investments exhibit different skewness: positive skewness for A, no skewness for B, and negative skewness for C. Which investment is leastattractive to the investor?

Solutions

Expert Solution

When 3 investments have the same expected return and variance, investors don't prefer positive skewness.

Having a positive skew implies having outliers or very few values on the positive(returns) side while having most of the values around the left and middle of the distribution. If positive and negative skew have the same mean(avg return), then investors would prefer negative skew than a positive one i.e. having more values with positive returns than negative.

Hence investment A is least attractive to the investor.

jeff jeffy answered 2 years ago

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