Question

suppose you have the following investment options available: (a) risk-free asset with a rate of return 8%, and (b) risky asset earning an expected return 20%, and standard deviation 40%. if you construct a portfolio of the above two instruments with a standard deviation of 30%, what will the expected return of your portfolio be?

Answer 1

Explanation:

suppose you have the following investment options available: (a) risk-free asset with a rate of return 8%, and (b) risky asset earning an expected return 20%, and standard deviation 40%. if you construct a portfolio of the above two instruments with a standard deviation of 30%, what will the expected return of your portfolio be?

The standard deviation can be found by taking the square root of the variance. Therefore, theportfolio standard deviation is 16.6% (√(0.5²*0.06 + 0.5²*0.05 + 2*0.5*0.5*0.4*0.0224*0.0245)). Standard deviation is calculated, much like expected return, to judge the realized performance of aportfolio manager.