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Consider a risk-free rate of interest of 1% and the following risky portfolios: Portfolio V: E(r)...

Consider a risk-free rate of interest of 1% and the following risky portfolios: Portfolio V: E(r) = 10%; risk = 20%. Portfolio W: E(r) = 6%; risk = 15%. Portfolio X: E(r) = 8%; risk = 17%. Portfolio Y: E(r) = 9%; risk = 18%. Portfolio Z: E(r) = 15%; risk = 28%. An investor must develop a complete portfolio by combining the risk-free asset with one of the risky portfolios mentioned above. The risky portfolio the investor should choose as part of his complete portfolio to achieve the best Capital Allocation Line would be ________.

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W. portfolio V. portfolio X. portfolio Z. portfolio Y. PreviousNext

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Answer #1

Decision shall be made on the basis of Coefficient of variation . The portfolio having the lowest COV shall be choosen. COV means risk per unit of return .

COV for Portfolio = risk / return

COV for Portfolio V = 20/10 = 2

COV for Portfolio W = 15/6 = 2.5

COV for Portfolio X = 17/8= 2.125

COV for Portfolio Y = 18/9 = 2

COV for Portfolio Z = 28 / 15 = 1.87

The risky portfolio the investor should choose as part of his complete portfolio to achieve the best Capital Allocation Line would be Portfolio Z.

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