Consider two portfolios Portfolio A has an average return of

Consider two portfolios. Portfolio A has an average return of 10% and standard deviation of 20%. Portfolio B has an average return of 20% and standard deviation of 30%. The risk-free rate is 5%. Which portfolio has a better risk/return tradeoff? Type in 1 if your answer is \"A\" and 2 if your answer if \"B. 0 1 0 2 1 pts Question 7 What do you think would happen to the expected return on stocks if investors perceived an increase in the volatility of stocks? Type in 1 if your answer is \"increase\" and 2 if your answer is \"decrease.\" 0 1 0 2

Solution

Correct option is > 2

Coefficient of variation = Standard deviation / Return

For A = 20%/10% = 2

For B = 30%/20% = 1.5

B has lower coefficient of variation which means better the portfolio

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Correct option is > 2

The higher volatility may result in lower than the expected returns hence, returns may decrease at overall level.