Consider a T-Bill with a Rate of Return of 5

question 18

Multiple Choice

Consider a T-bill with a rate of return of 5% and the following risky securities: Security A: E(r) = 0.15; Variance = 0.04
Security B: E(r) = 0.10; Variance = 0.0225
Security C: E(r) = 0.12; Variance = 0.01
Security D: E(r) = 0.13; Variance = 0.0625
From which set of portfolios, formed with the T-bill and any one of the four risky securities, would a risk-averse investor always choose his portfolio?

• A) The set of portfolios formed with the T-bill and security A.
• B) The set of portfolios formed with the T-bill and security B.
• C) The set of portfolios formed with the T-bill and security C.
• D) The set of portfolios formed with the T-bill and security D.
• E) Cannot be determined.

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Definitions:

Cash Inflows

The total amount of money being transferred into a company, typically from operational, investment, and financing activities.

Investment Projects

Initiatives undertaken by a business or individual involving the allocation of resources with the expectation of future benefits, such as profits or interest.

Profitability Index

Profitability Index (PI) is an investment appraisal technique that calculates the ratio between the present value of future cash flows and the initial investment cost, helping to determine the desirability of a project.

Cash Outflows

Money or funds leaving a business, typically for expenses, investments, or other payments.