Assume that an investor invests in one risky and one risk free asset. Let σ_m be the standard deviation of the risky asset and b the proportion of the portfolio invested in the risky asset. The standard deviation of the portfolio is then equal to ________. C) (1 - b) σ_m D) b σ_m

Question

Quizplus · Accepted Answer

The standard deviation of a portfolio combining a risky asset and a risk-free asset is given by: σP = bσ_m + (1 - b)σR where σR = 0 (as the risk-free asset has no risk) Substituting σR = 0 and simplifying the equation, we get: σP = bσ_m Therefore, the standard deviation of the portfolio is directly proportional to the proportion of the portfolio invested in the risky asset, and the correct answer is D.

Assume That an Investor Invests in One Risky and One