Question

Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard deviation of 0.15, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve for a risk averse investor?A) E(r) = 0.15; Standard deviation = 0.20.B) E(r) = 0.15; Standard deviation = 0.10.C) E(r) = 0.10; Standard deviation = 0.10.D) E(r) = 0.20; Standard deviation = 0.15.E) E(r) = 0.10; Standard deviation = 0.20.

Answer 1

Answer:

C) E(r) = 0.10; Standard deviation = 0.10.

Explanation:

the risky portfolio with an expected rate of return of 0.15 and standard deviation of 0.15 lies on the same indifference curve as another with:

• expected return of 0.10, standard deviation of 0.10
• expected return of 0.05, standard deviation of 0.05
• expected return of 0.20, standard deviation of 0.20
• etc.

All the points in this indifference curve will have an expected return = to the standard deviation, you exchange one unit of expected return per one unit of standard deviation.