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

Answer 1

An investor is indifferent between two portfolios on same indifference curve.

Standard Deviation is a measure of risk. Higher the risk, higher should be the return

Hence, the answer is

B. Return = 0.10, Standard Deviation = 0.10

A provides same return for lower risk, hence, will not be on same indifference curve

C provides lower return for higher risk

D provides Higher return for lower risk

E provides lower return for higher risk

B provides lower return for lower risk, hence, can lie on same curve