Question

Evaluate the following investments, and explain the “best” choice among Portfolios A, B, and C,
assuming that borrowing and lending at a risk-free rate of ?? = 3 percent is possible.
Portfolio A: ?(??) = 13% , ?(??) = 15%
Portfolio B: ?(??) = 10% , ?(??) = 8%
Portfolio C: ?(??) = 11% , ?(??) = 14%

Answer 1

Coefficient of variation is a measure used to assess the total risk per unit of return of an investment. It is calculated by dividing the standard deviation of an investment by its expected rate of return.

Since most investors are risk-averse, they want to minimize their risk per unit of return.

Coefficient of Variation= Standard Deviation of the Investment / Expected Return on the Investment

Portfolio A: Coefficient of Variation = 15% / 13% = 1.153

Portfolio B: Coefficient of Variation = 8% / 10% = 0.800

Portfolio C: Coefficient of Variation = 14% / 11% = 1.272

Since Portfolio C has the lower coefficient of variation, it offers less risk per unit of return