An investor wishes to construct a portfolio consisting of a 70 percent allocation to a stock index and a 30 percent allocation to a risk-free asset. The return on the risk-free asset is 4.5 percent, and the expected return on the stock index is 12 percent. The standard deviation of returns on the stock index is 6 percent. Calculate the expected standard deviation of the portfolio.
A) 4.20 percent
B) 25.20 percent
C) 3.29 percent
D) 10.80 percent
E) 5.02 percent

Question

Quizplus · Accepted Answer

The expected standard deviation of the portfolio can be calculated by multiplying the standard deviation of the stock index by the allocation to the stock index, because the risk-free asset has a standard deviation of 0 (it's risk-free). Therefore, the calculation is 6% * 70% = 4.20%.

An Investor Wishes to Construct a Portfolio Consisting of a 70