Question

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are _________ and _________ respectively. a. 10%; 6.7%b. 12%; 22.4%c. 12%; 15.7%d. 10%; 35%

Answer 1

Answer:

c. 12%; 15.7%

Explanation:

The computations are shown below:

For expected rate of return:

= (Weightage of risky asset × return of risky asset) + (Weightage of treasury bill × return of treasury bill)

= (0.70 × 0.15) + (0.30 × 0.05)

= 10.5% + 1.5%

= 12%

For standard deviation:

= Weightage of risky asset × (variance ^ half)

= 0.70 × (0.05 ^ 0.5)

= 15.7%