Explain, in no more than 100 words, how investors’ degree of risk tolerance influences the choice of their optimal complete portfolio from the set of all feasible choices.
Explain, in no more than 100 words, how investors’ degree of risk tolerance influences the choice of their optimal complete portfolio from the set of all feasible choices.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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c) Explain, in no more than 100 words, how investors’ degree of risk tolerance influences the choice of their optimal complete portfolio from the set of all feasible choices.
Transcribed Image Text:Question 3
a) Your current portfolio of investments has an expected rate of return of 12% and a
standard deviation of 16%. Table 1 shows the information about four risky portfolios A,
B, C, and D. If your objective with portfolio selection is to efficiently diversify risk and
you wanted to add one of these four portfolios to your current portfolio, explain, in no
more than 100 words, which portfolio you would prefer and why would you not
consider the other portfolios.
Table 1
Expected Return
(%)
Portfolio
Standard
Correlation with
Deviation (%)
current portfolio
A
13%
15%
0.35
В
17%
25%
0.85
C
10%
15%
0.30
16%
25%
0.80
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