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.

Explanation / Answer

E[rp] SD CV Fund A 16 25 1.56 Fund B 16 20 1.25 Fund C 10 12 1.20 Beause of Coefficient of Variation of Fund B is lesser than Fund A, and Fund B have highest Beta, we must choose Fund B. Fund A is more volatile, i.e. riski than Fund B.

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