Treasury notes are paying a 4% rate of return. A risk averse investor with a risk aversion of A = 3 should invest in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ________.
A)8.67%
B)9.84%
C)12.64%
D)14.68%

Question

Quizplus · Accepted Answer

According to the formula:

E(Rp) = Rf + (A*(σp))

where, 
E(Rp) = expected return of the portfolio
Rf = risk-free rate = 4%
A = risk aversion = 3
σp = standard deviation of the portfolio

Plugging in the values, we get:

E(Rp) = 4% + (3*(24%)) = 76%

Therefore, the investor should invest in the risky portfolio only if its expected return is at least 12.64% (option C).

Treasury Notes Are Paying a 4% Rate of Return