If the expected return to a risky portfolio is 12% with standard deviation 10%, and if the return to the riskless asset is 7%, then the expected return and Volatility for a portfolio consisting of 1/2) riskless bonds and 1/2) the risky portfolio would be:
A) 7% return, 10% Volatility
B) 9.5% return, 5% Volatility
C) 9.5% return, 10% Volatility
D) 10% return, 10% Volatility
E) Cannot be computed with the information given.

Question

Quizplus · Accepted Answer

The expected return of the mixed portfolio is the weighted average of the returns of the individual components. Thus, (0.5 * 7%) + (0.5 * 12%) = 3.5% + 6% = 9.5%. The volatility of the riskless asset is 0%, so the portfolio's volatility is only due to the risky asset, which is halved because it constitutes half of the portfolio, resulting in (0.5 * 10%) = 5%.

If the Expected Return to a Risky Portfolio Is 12