Question

Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______. Multiple Choice

asset B asset A
no risky asset
The answer cannot be determined from the data given.

Answer 1

Correct option is B.

Asset A

Step-by-step explanation:

Reward to variability ratio = return/σ

Asset A,σ = 15/0.4 = 37.5

Asset B,σ = 20/0.3 = 66.67

Since deviation(volatility) is lesser for asset A,a risk investor would prefer asset A.