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 = 0.20

B.

E(r) = 0.10; Standard deviation = 0.10

C.

E(r) = 0.15; Standard deviation = 0.20

D.

E(r) = 0.16; Standard deviation = 0.10

E.

E(r) = 0.20; Standard deviation = 0.15

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

C provides lower return for higher risk

D provides same return for lower risk

E provides higher return for lower risk

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