Choosing One Portfolio. The following table shows your predictions of the future

Question

Choosing One Portfolio. The following table shows your predictions of the future returns on three mutual funds. Treasury Bills currently earn 4%. To invest all your wealth, you are limited to choosing a portfolio of only one of these three funds along with T-Bills. You are risk averse and able to borrow and short-sell. Which one of the three risky funds do you choose to invest in. Simple calculations or a graph may be helpful to illustrate your choices.

Compare Fund A to Fund B. Which do you prefer? Explain.

You will upload a Word Document that shows all of your work and the solution.

T-Bills Fund A Fund B Fund C E[rp] 4% 16% 16% 10% p 25% 20% 12% p .90 1.00 0.60

Explanation / Answer

Coeffecient of Variation = SD/Expected Return

Fund A

Coeffecient of Variation = SD/Expected Return

Coeffecient of Variation = 25%/16%

Coeffecient of Variation = 1.56

Fund B

Coeffecient of Variation = SD/Expected Return

Coeffecient of Variation = 20%/16%

Coeffecient of Variation = 1.25

Fund C

Coeffecient of Variation = SD/Expected Return

Coeffecient of Variation = 12%/10%

Coeffecient of Variation = 1.2

Among three fund Fund C has lower Coeffecient of Variation which is having lower risk in compare to other.

Preference : As the Investor is risk averse , so he must select Fund C which is having lower risk in compare to other.

Among A and B funds the coeffecient of variation for fund B is lower so, risk is also lower so we prefer fond B.

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