Question

In the market there are three financial instruments with the following characteristics:
Instrument Expected rate of return Risk(standard deviation)
A 11% 6%
B 13% 4%
C 16% 5%
Which instrument will be chosen by a rational investor?

Answer 1

A

return to risk ratio

=11%/6%

=1.83

B

return to risk ratio

=13%/4%

=3.25

C

return to risk ratio

=16%/5%

=3.2

Which instrument will be chosen by a rational investor= B because it gives highest return per unit of risk