Treasury bills 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

To determine the minimum expected return of the risky portfolio that the investor will choose, we need to use the formula: 
E(Rp) = Rf + (A * σp)
Where:
E(Rp) = expected return of the risky portfolio, 
Rf = risk-free rate, which is the Treasury bills rate = 4%, 
A = risk aversion coefficient = 3, 
σp = standard deviation of risky portfolio's returns.

Substituting the given values:
E(Rp) = 4% + (3 * 24%)
E(Rp) = 4% + 72%
E(Rp) = 76%

Therefore, the risky portfolio's expected return must be at least 76% for the investor to choose it, which is closest to option C: 12.64%.

Treasury Bills Are Paying a 4% Rate of Return