You currently have $100 000 invested in a portfolio that has an expected return of 12% and a

QUESTION

You currently have $100,000 invested in a portfolio that has an expected return of 12% and a volatility of 8%. Suppose the risk-free rate is 5%, and there is another portfolio that has an expected return of 20% and a volatility of 12%. a. What portfolio has a higher expected return than your portfolio but with the same volatility? b. What portfolio has a lower volatility than your portfolio but with the same expected return?
ANSWER (a) We calculate reurn per unit of volatility as return / volatility *100 For first prtfolio =12/8 *100 =150 For second portfolio = 20/12 *100=166.67 Hence second portfolio has better (HIGHER) return per unit of volatility (b) We calculate volatility per unit of return as Volatility/ return *100 For first

portfolio = 8/12 *100 = 66.67% For second portfolio =12/20*100 = 60% Hence second portfolio has lower volatility per unit of return IN ALL SECOND PORTFOLI GIVES LESSER RISK AND HIGHER RETURN AND HENCE IS BETTER

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