CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
An investor puts 40% of her wealth in a risk-free asset yielding 3% and 60% in a risky portfolio with an expected return of 10% and a standard deviation of 15%. The expected return and standard deviation of the combined portfolio are closest to:
Expected return is 0.4 times 3% plus 0.6 times 10%, giving 7.2%. The risk-free asset has zero standard deviation and zero correlation, so portfolio risk is 0.6 times 15%, which is 9.0%. The answer is 7.2% and 9.0%.
- A7.2% and 9.0%
- B7.8% and 9.0%Correct
- C7.8% and 15.0%
Explanation
Expected return = 0.4×3% + 0.6×10% = 1.2% + 6.0% = 7.2%. Wait, recompute: 1.2 + 6.0 = 7.2%, so the correct return is 7.2%. Standard deviation = 0.6×15% = 9.0%. The option with 7.2% and 9.0% is therefore correct.
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