If the risk-free rate is 5.5 percent, which of these portfolios has the highest

Question

If the risk-free rate is 5.5 percent, which of these portfolios has the highest reward-to-risk ratio? Show your work.

1.23

Portfilio 1 Security Amount Invested Expected Return Beta Security A $4000 9% .80 Security B $5000 12% 1.15 Security C $12000 14% .95 Security D $8000 15%

1.23

Portfolio 2 Security A $3000 16% 1.22 Security B $11000 13% 1.54 Security C $9000 8% .87 Security D $6000 11% .81 Portfolio 3 Security A $15000 10% 1.72 Security B $12000 9% .81 Security C $3000 12% .72 Security D $2000 15% 1.54

Explanation / Answer

Let's calculate the expected returns and beta for all the three portfolios.

Portfolio's Expected Returns = Sum of Investment x Returns / Sum of Investment

Portfolio's Beta = Sum of Investment x Beta / Sum of investment

Beta is a measure of risk.

We get that for Portfolio 1, we have lowest beta and higher expected returns. Hence, we should select Portfolio 1.

Security Investment Returns Beta Security A $4,000 9% 0.8 Security B $5,000 12% 1.15 Security C $12,000 14% 0.95 Security D $8,000 15% 1.23 Portfilio 1 13.24% 1.04

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