Question

The exact indifference curves of different investorsaccording to the mean-variance criterion, which one of the following investments dominates all others? multiple choice e(r) = 0.16; variance = 0.23 e(r) = 0.10; variance = 0.23 e(r) = 0.10; variance = 0.25 e(r) = 0.16; variance = 0.20 none of these options dominates the other alternatives.

Answer 1

The investment with an expected return (e(R)) of 0.16 and a variance of 0.20 dominates other options as it provides the highest expected return with the lowest risk, in line with the mean-variance criterion.

Step-by-step explanation:

According to the mean-variance criterion, which is applied in the context of portfolio theory and investment decision-making, investors choose investments based on the trade-off between expected return and risk, with risk often quantified as variance. In the multiple-choice problem provided, we have to determine which investment dominates others by offering a higher expected return (e(R)) for a given level of risk or offering a lower level of risk (variance) for a given expected return.

To identify the dominating investment, we look at the pair of expected return and variance for each option:

• e(R) = 0.16; variance = 0.23

• e(R) = 0.10; variance = 0.23

• e(R) = 0.10; variance = 0.25

• e(R) = 0.16; variance = 0.20

The investment with e(R) = 0.16 and variance = 0.20 dominates the other options provided as it offers the highest expected return with the lowest variance, indicating the highest average return with lower risk. Therefore, investors would prefer this option according to the mean-variance criterion.