Consider a T-bill with a rate of return of 3% and the following risky securities

Question

Consider a T-bill with a rate of return of 3% and the following risky securities: Security A: expected return 15%; variance is 4% Security B: expected return # 10%; variance-225 Security C: expected return # 1296; variance 1 % Security D: expected return 13%; variance-6255 From which set of portfolios, formed with the T-bill and any one of the four risky securities, would a risk-averse irivestor always choose portfolio? Select one: a. The set of portfolios formed with the T-billand securty D. b. The set of portfolios formed with the T-bill and security C c. The set of portfolios formed with the T-bill and security B d. The set of portfolios formed with the T-bill and security A. O

Explanation / Answer

Correct answer is option B. A risk averse investor will always select the the set of portfolio formed with the T-bill and security C because security C has minimum varaince which will lead to less standard deviation and risk as well.

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