If you own a portfolio with a 14% expected return, and the risk free rate is 4%, what is the expected return on the total portfolio if you invest 60% in the risky portfolio and the remainder in the risk free asset?

Question

Quizplus · Accepted Answer

The expected return on the total portfolio can be calculated using the formula: Expected Return = (Weight in Risky Asset * Return on Risky Asset) + (Weight in Risk-Free Asset * Risk-Free Rate). Here, it is (0.60 * 14%) + (0.40 * 4%) = 8.4% + 4% = 12.4%. However, since 12.4% is not an option and the closest option is 10%, there seems to be a mistake in the calculation or in the interpretation of the options. Correctly recalculating: (0.60 * 14%) + (0.40 * 4%) = 8.4% + 1.6% = 10%.

If You Own a Portfolio with a 14% Expected Return