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    Question

    A firm evaluates two projects with identical expected

    cash flows, but Project A has higher variability. If the firm is risk-averse, what would be its decision?
    A Prefer Project A due to potential for high return Correct Answer Incorrect Answer
    B Indifferent to both projects Correct Answer Incorrect Answer
    C Prefer Project with lower standard deviation Correct Answer Incorrect Answer
    D Choose project with higher NPV only Correct Answer Incorrect Answer

    Solution

    Risk-averse firms prefer certainty. Given equal expected returns, lower standard deviation (risk) is preferable. This is aligned with decision-making under uncertainty.

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