Chapter 7-Risk, Return, and the Capital Asset Pricing Model MULTIPLE CHOICE Supp

Question

Chapter 7-Risk, Return, and the Capital Asset Pricing Model MULTIPLE CHOICE Suppose Sarah can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios should she hold in combination with a position in the risk-free asset? a. portfolio with a standard deviation of 15% and an expected return of 12% b. portfolio with a standard deviation of 19% and an expected return of 15% c. portfolio with a standard deviation of 25% and an expected return of 18% I. d portfolio with a standard deviation of 12% and an expected return of 9%

Explanation / Answer

Answer:- Suppose Sarah can borrow and lend at the risk-free-rate of 3%. Which of the following four risky portfolios should she hold in combination with a position in the risk-free asset?

Correct option:- portfolio with a standard deviation of 19% and an expected return of 15%

Reason:- For the selection of the best portfolio combination, we need to draw a line from the risk-free rate to each dot in the figure and the line with the highest slope should be selected.

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