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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process

Two assets have expected returns of 12% (Asset A) and 8% (Asset B). A portfolio invests 40% in A and 60% in B, with correlation of +1 and standard deviations of 20% for A and 10% for B. What are the portfolio's expected return and standard deviation?

Expected return is 9.6% and standard deviation is 14%. Return is the weighted average of 12% and 8% at 40:60 weights, and with a correlation of +1 there is no diversification benefit, so the standard deviation is also the weighted average of 20% and 10%.

  1. A9.6% and 14%Correct
  2. B9.6% and 12.5%
  3. C10% and 14%
  4. D9.6% and 10.2%

Explanation

Expected return = 0.4x12 + 0.6x8 = 4.8 + 4.8 = 9.6%. With correlation +1, SD is the weighted average: 0.4x20 + 0.6x10 = 8 + 6 = 14%. Using 12.5% or 10.2% reflects a wrong risk formula or lower correlation, and 10% comes from equal weights.

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