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CFA Level I · CFA Level I Exam · The Return and Risk of a Financial Portfolio

The risk-free rate is 3%. A risky portfolio has an expected return of 11% and a standard deviation of 16%. An investor wants a portfolio on the CAL with a standard deviation of 24%. The expected return of this portfolio is closest to:

The expected return is 15%. The CAL slope is (11% - 3%)/16% = 0.50, so at 24% risk the return is 3% + 0.50 × 24% = 15%. This corresponds to borrowing at the risk-free rate to hold 150% in the risky portfolio.

  1. A12.0%
  2. B15.0%
  3. C17.0%Correct

Explanation

Sharpe ratio = (11% - 3%)/16% = 0.50. Required risk of 24% means leverage of 24/16 = 1.5 in the risky portfolio (borrowing at the risk-free rate). Expected return = 3% + 0.50 × 24% = 15%. Check: 1.5 × 11% - 0.5 × 3% = 16.5% - 1.5% = 15%. The 12% option mistakenly uses 0.5 weights; 17% is not supported.

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