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Portfilio 1 Security Amount Invested Expected Return Beta Security A $4000 9% .80 Security B $5000 12% 1.15 Security C $12000 14% .95 Security D
Portfilio 1 |
| ||
Security | Amount Invested | Expected Return | Beta |
Security A | $4000 | 9% | .80 |
Security B | $5000 | 12% | 1.15 |
Security C | $12000 | 14% | .95 |
Security D | $8000 | 15% | 1.23 |
Portfolio 2 |
| ||
Security A | $3000 | 16% | 1.22 |
Security B | $11000 | 13% | 1.54 |
Security C | $9000 | 8% | .87 |
Security D | $6000 | 11% | .81 |
Portfolio 3 |
| ||
Security A | $15000 | 10% | 1.72 |
Security B | $12000 | 9% | .81 |
Security C | $3000 | 12% | .72 |
Security D | $2000 | 15% | 1.54 |
Suppose that the risk-free rate is 5.5 percent, the return over a three-year period for each portfolio matches its expected return, and the portfolios have 3-year annual return standard deviations as follows:
Portfolio 1 22%
Portfolio 2 26%
Portfolio 3 18%
If you were restricted to selecting one of the three portfolios to invest all your money in, which should you choose based on that portfolio having the best ratio of excess return per unit of total risk as measured by its Sharpe ratio?
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