Suppose that Ms.Lynch can make up her portfolio using a risk-free asset that offers a surefire rate of return of 5% and a risky asset with an expected rate of return of 10%, with standard deviation 5.If she chooses a portfolio with an expected rate of return of 8.75%, then the standard deviation of her return on this portfolio will be
A)7.50%.
B)3.75%.
C)1.88%.
D)6.75%.
E)None of the above.

Question

Suppose that Ms.Lynch  can make up her portfolio using a risk-free asset that offers a surefire rate of return of 5% and a risky asset with an expected rate of return of 10%, with standard deviation 5.If she chooses a portfolio with an expected rate of return of 8.75%, then the standard deviation of her return on this portfolio will be
A)7.50%.
B)3.75%.
C)1.88%.
D)6.75%.
E)None of the above.

Quizplus · Accepted Answer

The portfolio's expected return is a weighted average of the risk-free and risky asset returns. Solving for the weight of the risky asset (w) in the portfolio: 0.05(1-w) + 0.10w = 0.0875 gives w = 0.75. The standard deviation of the portfolio is then 0.75 * 5% = 3.75%.

Suppose That Ms