Allison's Portfolio Has an Expected Return of 14% and a Standard

question 18

Multiple Choice

Allison's portfolio has an expected return of 14% and a standard deviation of of 20%. Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%. The risk-free rate is 3%. According to the Sharpe measure,

• A) Allison has the better portfolio.
• B) Brianna has the better portfolio.
• C) The portfolio's are equally desirable.
• D) The answer depends on Allison and Brianna's risk tolerance.

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Definitions:

Successive Years

Successive years that occur back-to-back without any breaks.

Compounded Quarterly

A method of calculating interest where it is added to the principal four times a year, after every three months, leading to faster growth of the investment.

Prepayment

Payment made for goods or services before they are received or required.

Discounting

The process of determining the present value of a payment or a series of payments that will be made in the future.