Concept explainers
Efficient portfolios For each of the following pairs of investments, state which would always be preferred by a rational investor (assuming that these are the only investments available to the investor):
- a. Portfolio A, r = 18% σ = 20%; portfolio B, r = 14% σ = 20%.
- b. Portfolio C, r = 15% σ = 18%; portfolio D, r = 13% σ = 8%.
- c. Portfolio E, r = 14% σ = 16%; portfolio F, r = 14% σ = 10%.
To discuss: Whether portfolio A or B most preferable for a rational investor
Explanation of Solution
Portfolio A : Investors prefer maximum return at a given level of risk.
To discuss: Whether portfolio C or D most preferable for a rational investor
Explanation of Solution
Portfolio C : Investors prefer maximum return at a given level of risk.
To discuss: Whether portfolio D or E most preferable for a rational investor
Explanation of Solution
Portfolio D: Investors prefer maximum return per unit of risk.
To discuss: Whether portfolio E or F most preferable for a rational investor
Explanation of Solution
Portfolio F: Investors prefer low risk given a stated rate of return.
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