CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
A risky portfolio has an expected return of 11% and a standard deviation of 20%. The risk-free rate is 3%. An investor holds 60% in the risky portfolio and 40% in the risk-free asset. The expected return of the investor's complete portfolio is closest to:
The expected return is about 7.8%. Weight the risky portfolio's 11% by 60% and the risk-free 3% by 40%, giving 6.6% plus 1.2%. Equivalently, add 60% of the 8% risk premium to the 3% risk-free rate.
- A6.6%
- B7.8%Correct
- C9.0%
Explanation
E(R) = 0.6 × 11% + 0.4 × 3% = 6.6% + 1.2% = 7.8%. Check via CAL: 3% + 0.6 × (11% − 3%) = 7.8%. The 6.6% option omits the risk-free contribution.
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