CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
The risk-free rate is 4%. Risky portfolio P has an expected return of 12% and a standard deviation of 16%. An investor wants a standard deviation of 12% using only P and the risk-free asset. The expected return on the investor's portfolio is closest to:
The weight in the risky portfolio is 12% divided by 16%, or 75%. Expected return is the 4% risk-free rate plus 0.75 times the 8% risk premium, giving 10%. The investor holds 25% in the risk-free asset.
- A8.0%
- B10.0%Correct
- C11.0%
Explanation
Weight in P = 12/16 = 0.75. Expected return = 4% + 0.75×(12% − 4%) = 4% + 6% = 10%. Check: 0.25×4 + 0.75×12 = 1 + 9 = 10%. The 8% option wrongly uses a weight of 0.5.
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