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Choosing One Portfolio. The following table shows your predictions of the future returns on three mutual funds. Treasury Bills currently earn 4%. To invest all
Choosing One Portfolio. The following table shows your predictions of the future returns on three mutual funds. Treasury Bills currently earn 4%. To invest all your wealth, you are limited to choosing a portfolio of only one of these three funds along with T-Bills. You are risk averse and able to borrow and short-sell. Which one of the three risky funds do you choose to invest in. Simple calculations or a graph may be helpful to illustrate your choices.
Compare Fund A to Fund B. Which do you prefer? Explain.
T-Bills | Fund A | Fund B | Fund C | |
E[rp] | 4% | 16% | 16% | 10% |
p | 25% | 20% | 12% | |
p | .90 | 1.00 | 0.60 |
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