An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.17 and a variance of 0.08 and 60% in a T-bill that pays 4.5%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

Question

Quizplus · Accepted Answer

To calculate the portfolio's expected return, we use the following formula:

Expected Return = (Weight of Asset 1 × Expected Return of Asset 1) + (Weight of Asset 2 × Expected Return of Asset 2)

= (0.40 × 0.17) + (0.60 × 0.045)

= 0.095

To calculate the portfolio's standard deviation, we use the following formula:

Standard Deviation = √[(Weight of Asset 1)^2 × Variance of Asset 1 + (Weight of Asset 2)^2 × Variance of Asset 2 + 2 × Weight of Asset 1 × Weight of Asset 2 × Covariance between Asset 1 and Asset 2]

Since T-bills have zero covariance with all other assets, the last term drops out of the equation, and we get:

Standard Deviation = √[(0.40)^2 × 0.08 + (0.60)^2 × 0]

= √(0.0128)

= 0.113

Therefore, the portfolio's expected return is 0.095 and its standard deviation is 0.113. The best answer is C.

An Investor Invests 40% of His Wealth in a Risky