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Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ___________.
A. asset AB. asset BC. no risky assetD. The answer cannot be determined from the data given.

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Answer:

The formula for reward to variability ratio is (ER-RF)/STD

ER is the expected return on the stock, RF is the risk free rate and STD is the standard deviation of the stock. In this formula we are essentially calculating how much extra risk we have to take for excess returns. If asset A has a reward to variability ratio of 0.4 and Asset B has a reward to variability ratio of 0.3 it means that for every one percent of standard deviation on stock A the excess return is 0.4% and 0.3% for stock B.

So in this case A risk averse investor would prefer using the risk free asset and Asset A because asset A provides more excess return per risk compared to Asset B so the risk averse investor would prefer to take less risk per return.

Explanation:

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