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Ms. Lo can make a portfolio using a risk-free asset that offers a sure 10% return...

Ms. Lo can make a portfolio using a risk-free asset that offers a sure 10% return and a risky asset with an expected rate of return of 25%, with standard deviation 5. If she chooses a portfolio with an expected rate of return of 25%, what will the standard deviation of her return on this portfolio be?

PLEASE SHOW ALL WORK, NO EXCEL

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Answer #1

If the portfolio return is 25% it can only be achieved when the entire portfolio is invested in the risky asset and none of it in risk free return. Any other combination between the two will always result in a return lower than 25%

Therefore the portfolio standard deviation will equal the standard deviation of the risky asset which is 5

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