Consider a treasury bill with a rate of return of 5% and the following risky securities:
Security A: E(r)= .15; variance = .0400
Security B: E(r)= .10; variance = .0225
Security C: E(r)= .12; variance = .1000
Security D: E(r)= .13; variance = .0625
The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above.The security the investor should choose as part of his complete portfolio to achieve the best CAL would be _________.
A) security A
B) security B
C) security C
D) security D

Question

Quizplus · Accepted Answer

The best CAL (Capital Allocation Line) is achieved by maximizing the Sharpe ratio, which is calculated as (E(r) - risk-free rate) / standard deviation. Security A has the highest expected return and the lowest variance relative to its return, resulting in the highest Sharpe ratio.

Consider a Treasury Bill with a Rate of Return of 5