Question

Suppose that Jason manages a risky portfolio with an expected return of 15% and a standard deviation of 25%. The (risk-free) T-bill rate is 4%.

Connor, a friend of Jason’s, decides to invest 70% of his wealth into Jason’s fund and 30% into a T-bill money market fund.

What is the expected return (E[R_c]) and standard deviation (σ_c) of Connor’s portfolio?

A. E[Rc] of Connor’s portfolio is 14.5% and σc is 17.5%.

B. E[Rc] of Connor’s portfolio is 11.7% and σc is 17.5%.

C. E[Rc] of Connor’s portfolio is 11.7% and σc is 7.5%.

Answer 1

	Expected return%=	Wt Risky portfolio*Return Risky portfolio+Wt T bill*Return T bill
	Expected return%=	0.7*0.15+0.3*0.04
	Expected return%=	11.7
	Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
	Variance	=0.7^2*0.25^2+0.3^2*0^2+2*0.7*0.3*0.25*0*0
	Variance	0.03063
	Standard deviation=	(variance)^0.5
	Standard deviation=	17.50%