A bank is considering two investment portfolios composed of a mix of government securities (federal and municipal securities).

The first portfolio (A) has a return of 7% with probability of 0.8 and returns of 8% and 6% with 0.10 probability. The second portfolio (B)

has a return of 6% with probability of 0.05 and a return of 8% with a probability of 0.5. The portfolios have the same liquidity.

Calculate the expected return and standard deviation of the return for each portfolio as a percentage to 2 decimal places.

Portfolio A

Portolio B

Expected return

%

%

Standard deviation

%

%

Which portfolio has the best combination of risk, return, and liquidity?