Consider a T-bill with a rate of return of 5% and the following risky securities: Security A: E(r) = 0.15; Variance = 0.04
Security B: E(r) = 0.10; Variance = 0.0225
Security C: E(r) = 0.12; Variance = 0.01
Security D: E(r) = 0.13; Variance = 0.0625
From which set of portfolios, formed with the T-bill and any one of the four risky securities, would a risk-averse investor always choose his portfolio?
A) The set of portfolios formed with the T-bill and security A.
B) The set of portfolios formed with the T-bill and security B.
C) The set of portfolios formed with the T-bill and security C.
D) The set of portfolios formed with the T-bill and security D.
E) Cannot be determined.

Question

Quizplus · Accepted Answer

A risk-averse investor would prefer a portfolio that offers the highest return for the lowest level of risk. Security C has a relatively high expected return (E(r) = 0.12) with the lowest variance (0.01) among the given securities, indicating the least amount of risk. Therefore, a portfolio formed with the T-bill and Security C would be most appealing to a risk-averse investor.

Consider a T-Bill with a Rate of Return of 5