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 allocates 75% of her wealth to the risky portfolio and 25% to the risk-free asset. The expected return of the complete portfolio is closest to:
The complete portfolio's expected return is about 9.0%. It equals 25% times the 3% risk-free rate plus 75% times the 11% risky return, which is 0.75% plus 8.25%. Equivalently, the risk-free rate plus 75% of the 8% risk premium.
- A8.0%
- B9.0%Correct
- C11.3%
Explanation
E(R) = 0.25(3%) + 0.75(11%) = 0.75% + 8.25% = 9.0%. Check via CAL: 3% + 0.75(11% - 3%) = 3% + 6% = 9.0%. The 8.0% option wrongly uses 0.75 x 8% + 2%, ignoring the correct weights; 11.3% is not derived from the weights.
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