Question

Consider a risky portfolio, A, with an expected rate of return of 0.16 and a standard deviation of 0.16, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve?

A. E(r) = 0.10; Standard deviation = 0.10 B. E(r) = 0.20; Standard deviation = 0.15 C. E(r) = 0.16; Standard deviation = 0.10 D. E(r) = 0.15; Standard deviation = 0.20 E. E(r) = 0.10; Standard deviation = 0.20

Answer 1

Correct Answer is A E(r) = 0.10; Standard deviation = 0.10

Risky portfolio, A, with an expected rate of return of 0.16 and a standard deviation of 0.16

Risk reward ratio = Standard Deviation/return = 0.16/0.16 = 1

Portfolio	Retrun	Standard Deviation	Risk reward ratio
A	10	10	1.00
B	20	15	0.75
C	16	10	0.63
D	15	20	1.33
E	10	20	2.00

Option A has the same risk reward ratio as the Risky security therefor they lies on the same indifference curve.

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