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Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security

Security A: E(r)= 0.15; variance= 0.400
Security B: E(r)= 0.10; variance= 0.0225
Security C: E(r)=0.12; variance= 0.1000
Security D: E(r)=0.13; variance= 0.0625


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:

a. security D
b. security C
c. security A
d. security B

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buchinnamani208

Answer:

b. security C

Explanation:

Risk averse investors are investors that are not risk takers or are risk averse and so from the above, such investors will go for a less variable portfolio which has less risk. The security with the least risk from the options is option B. This is the security that the risk averse investor will choose to add to the portfolio with the risk free t bill

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