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CMA Final · Strategic Financial Management · Portfolio Theory and Practice

Meera Textiles' treasury invests 60% of its surplus fund in a risky portfolio with an expected return of 14% and a standard deviation of 20%, and the remaining 40% in a risk-free instrument yielding 6%. What is the expected return of the combined holding?

The expected return is 10.8%. It is the weighted average of the risky portfolio's 14% at a 60% weight and the risk-free 6% at a 40% weight, which gives 8.4% plus 2.4%. Swapping the weights would wrongly give 9.2%.

  1. A10.8%Correct
  2. B9.2%
  3. C10.0%
  4. D12.0%

Explanation

Expected return = 0.60 x 14% + 0.40 x 6% = 8.4% + 2.4% = 10.8%. The 9.2% option swaps the weights (0.4 x 14 + 0.6 x 6). The 12.0% option is the combined standard deviation (0.6 x 20%), not the return.

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