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FRM Part I · FRM Exam Part I · Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)

A portfolio holds 60% in Asset A (expected return 10%) and 40% in Asset B (expected return 5%). What is the expected return of the portfolio?

The expected return is 8.0%. Portfolio expected return is the weighted average of the asset returns, so 0.6 times 10% plus 0.4 times 5% gives 6% plus 2%. Correlation does not affect expected return, only risk.

  1. A7.5%
  2. B8.0%Correct
  3. C8.5%
  4. D6.0%

Explanation

Expected portfolio return is the weighted average: 0.6 × 10% + 0.4 × 5% = 6% + 2% = 8%. The 7.5% figure comes from equal weighting. The 6% figure counts only Asset A's contribution.

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