Question

For each of the following pairs of investments, indicate which would always be preferred by a rational investor (assuming that these are the only investments available to the investor):

a)
Portfolio A r = 19% σ = 21%
Portfolio B r = 15% σ = 21%
Preference:
O Portfolio A
O Portfolio B
O Indeterminate
b)
Portfolio C r = 20% σ = 21%
Portfolio D r = 18% σ = 15%
Preference:
O Indeterminate
O Portfolio C
O Portfolio D
c)
Portfolio E r = 9% σ = 15%
Portfolio F r = 9% σ = 9%
Preference:
O Portfolio E
O Portfolio F
O Indeterminate

Answer 1

a) Among the two portfolios, Portfolio-A and Portfolio-B, Portfolio-A would be preferred by a rational investor because both the portfolios have same risk which is indicated through standard deviation, but the returns are different. Hence Portfolio-A is chosen as it is giving the highest return.

b) Among the two portfolios, Portfolio-C and Portfolio-D, Portfolio-D would be preferred by a rational investor because it is less risky and based on the risk reward ratio, it is giving higher return for less amount of risk. Hence Portfolio-D is chosen as it is giving the highest return.

C.

Explanation:Among the two portfolios, Portfolio-E and Portfolio-F, Portfolio-F would be preferred by a rational investor because both the portfolios have same return but the risk levels are different. Hence Portfolio-F is chosen as it is giving the highest return for less amount of risk.