Consider two well-diversified portfolios. Portfolio 1 has an expected return of 8% and three-quarters average market risk while portfolio 2 has an expected return of 12% and a beta of 1.50. If the risk-free rate is 2.5%, which portfolio would a rational risk- averse investor prefer and why?

Portfolio 1 is to be chosen

Explanation:

The following formula is used to calculate the reward to risk ratio.

Reward-to-Risk ratio = (Expected Return - Risk free Rate)/Beta

For Portfolio 1,

Reward-to-Risk ratio =

For Portfolio 2,

Reward-to-Risk ratio =

Rationale risk investor would chhose portfolio 1 since it has higher reward to risk ratio

Note: the beta of portfolio 1 is taken as 3 by 4 which comes to 0.75

Portfolio 2 would be preferred by all the people and the investor because it has the highest return ratio percentage.                                      

Explanation:

d. all of the above are true.