An investor has a choice between a riskfree return of 5% and a portfolio with expected return of 12% and variance of 9%. She chooses a portfolio with 25% in the riskfree and 75% in the portfolio. The investor's level of risk tolerance is

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Quizplus · Accepted Answer

The investor's risk tolerance is the ratio of the expected return of the portfolio to the standard deviation of the portfolio. In this case, the expected return of the portfolio is 12% and the standard deviation of the portfolio is 9%. Therefore, the investor's risk tolerance is 12% / 9% = 1.33.

An Investor Has a Choice Between a Riskfree Return of 5