Question

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 her complete portfolio to achieve the best CAL would be _________.

Answer 1

A C Е F G Н K L М 1 2 3 First we will compute the Standard Deviation (SD) for each security 4 Next we will compute the Coefficient of Variation (CV) for the security, where 5 6 7 Security ER. Var SD CV 0.04 А 15% 0.20 1.33 10% В 0.02 0.15 1.50 0.10 10 C 12% 0.32 2.64 13% 1.92 11 0.06 0.25 12 The security having the lowest CV will have the minimum volatility and thus is lowest risky. Investor should choose A security 13 14 LO co

A В D F G First we will compute the Standard Deviation (SD) for each security Next we will compute the Coefficient of Variation (CV) for the security, where 6 7 Security ER Var SD CV -SQRT(E8) F8/D8 0.0225 =SQRT(E9) F9/D9 -SQRT(E10) F10/D10 0.13 0.0625 =SQRT(E11) =F11/D11 8 A 0.15 0.04 9 В 0.1 10 C 0.12 0.1 11 12 The security having the lowest CV will have the minimum volatility and thus is lowest risky. 13 14 Investor should choose A security