Answer:
Security A, Option A is correct
Explanation:
Variance of each security is given. Compute standard deviation of each security. Square root of variance of each security is the standard deviation.
Security A = [tex]\sqrt{0.04}[/tex] = 0.2
Security B = [tex]\sqrt{0.0225}[/tex] = 0.15
Security C = [tex]\sqrt{0.1}[/tex] = 0.316
Security D = [tex]\sqrt{0.0625}[/tex] = 0.25
Now, compute coefficient of variance of each security to compute its volatility as as shown below:
[tex]Coefficient\ of\ variation= \frac{Standard\ deviation}{Expected\ return}[/tex]
Security A = 0.2 ÷ 0.15 = 1.33
Security B = 0.15 ÷ 0.1 = 1.5
Security C = 0.316 ÷ 0.12 = 2.63
Security D = 0.25 ÷ 0.13 = 1.92
The security with minimum coefficient of variance is least variable or risky. In this case, Security A has the least coefficient of variance of 1.33, so investor should select security A with risk free asset to create a portfolio that gives best CAL.
