Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: Asset A E(r_A) = 10% σ_A = 20% Asset B E(r_B) = 15% σ_B = 27% An investor with a risk aversion of A = 3 would find that ________ on a risk-return basis. A) only asset A is acceptable B) only asset B is acceptable C) neither asset A nor asset B is acceptable D) both asset A and asset B are acceptable

Question

Quizplus · Accepted Answer

Based on the relationship: A = 11eaaae8_8b6b_21a7_a4b8_4bd0d25a6bfd_TB6474_11 The minimum acceptable return is given by: E(r_p) = 11eaaae8_8b6b_21a8_a4b8_7f0355de4afb_TB6474_11 + rf For A: E(r_A) = (3 × .04) + .05 = 17% For B: E(r_B) = (3 × .0729) + .05 = 26.87%

Two Assets Have the Following Expected Returns and Standard Deviations