Weight of the risky asset in the portfolio = w1 = 40%, Expected return on the risky asset = R1 = 15%, Varaince of the risky-asset = σ12 = 0.04
Weight of the treasury bill in the portfolio = w2 = 60%, Return on treasury bill = R2 = 6%, Variance of the treasury bill = σ22 = 0 [Treasury bills are risk-free and therefore variance is zero]
Expected return of the portfolio is given by the formula:
Expected portfolio return = E[RP] = w1*R1 + w2*R2 = 40%*15% + 60%*6% = 9.6%
Varaince of the portfolio is calculated using the formula:
Portfolio variance = σP2 = w12*σ12 = (40%)2*0.04 = 0.0064
Standard deviation is the square-root of the variance
Standard deviation of the portfolio = σP = (0.0064)1/2 = 0.08 = 8%
Expected return of the portfolio = 9.6%
Standard deviation of the portfolio = 8%
Answer -> 9.6%, 8% (Option 2)
12. An investor invests 40% of his wealth in a risky asset with an expected rate...
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