Question

Suppose that the following five portfolios are lying on the efficient frontier of an opportunity set,determine the best (optimal)portfolio,if the investor's risk tolerance is 40%

Portfolio	A	B	C	D	E
expected return	7.60	9.13	9.43	9.73	9.85
expected variance	0.19	0.52	0.61	0.74	0.75
standard deviation	4.32	7.24	7.79	8.59	8.67

Answer 1

Stocks should be compared on the basis of Co-efficient of variation. Co -efficient of variation calculates the risk per unit of return. So, the stock having least co-efficient of variation will be preferred.

Co-efficient of Variation = Standard deviation/ expected return

A	B	C	D	E
4.32/7.6 =0.568421	7.24/9.13= 0.79299	7.79/9.43= 0.826087	8.59/9.73=0.882837	8.67/9.85=0.880203

So, on the basis of co-efficient of variation, Stock A is the best stock