An investor invests 60% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 40% in a T-bill that pays 5%. His portfolio's expected return and standard deviation are __________ and __________, respectively.
A) 0.110; 0.12
B) 0.087; 0.06
C) 0.295; 0.12
D) 0.087; 0.12

Question

Quizplus · Accepted Answer

The expected return of the portfolio is calculated as the weighted average of the returns of the individual assets, which is (0.60 * 0.15) + (0.40 * 0.05) = 0.09 + 0.02 = 0.11 or 11%. The standard deviation of the portfolio is calculated only for the risky asset, as T-bills are risk-free. Therefore, the standard deviation of the portfolio is the square root of the variance of the risky asset multiplied by the square of its weight in the portfolio, which is sqrt(0.04) * 0.60 = 0.2 * 0.60 = 0.12.

An Investor Invests 60% of His Wealth in a Risky