Consider a T-bill with a rate of return of 5 percent 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 4 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 prefers portfolios with higher expected returns and lower variance. Security C has a relatively high expected return of 0.12 and the lowest variance of 0.01 among the risky securities, making it the most attractive option for a risk-averse investor.

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