Question

Consider a T­bill with a rate of return of 5% and the following risky securities:

Security A: E(r) = 0.15; Standard deviation= 0.2

Security B: E(r) = 0.10; Standard deviation= 0.15

Security C: E(r) = 0.17; Standard deviation= 0.28

Security D: E(r) = 0.13; Standard deviation= 0.25

If an investor wants to use the risk-free asset and one of the risky assets to form a complete portfolio, which risky asset should the investor choose?

Group of answer choices

Security B

Security D

Security C

Security A

Answer 1

Answer: Security A

Risk adjusted return: (E. Return –Risk free return)/Risk

Security A : (15% - 5%) / 20% = 0.5

Security B : (10% - 5%) / 15% = 0.33

Security C : (17% - 5%) / 28% =0.43

Security D : (13% - 5%) / 25% = 0.32

Security A had a higher risk-adjusted return, meaning that it gained less per unit of total risk than others.