Question

1. Suppose you have a portfolio that is 70% in the risk-free asset and 30% in a stock. The stock has a standard deviation of 0.30 (i.e., 30%). What is the standard deviation of the portfolio? A. 0.30 (i.e., 30%) B. 0.09 (i.e., 9%) C. 0.21 (i.e., 21%) D. 0
2. You have a total of $100,000 to invest in a portfolio of assets. The portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%?
A.
$60,000
B.
$40,000
C.
$70,000
D.
$30,000

Answer 1

1.

Standard deviation of stock = 30%

Standard deviation of risk free assets = 0%

Standard deviation of portfolio = (70% × 30%) + (30% × 0)

= 21% + 0%

= 21%

Standard deviation of portfolio is 21%.

2.

Suppose W percent invest in risky assets and (1 - W) percent in risk free assets.

11% = 15% × W + 5% × (1 - W)

11% = 15% × W + 5% - 5% × W

11% = 5% + 10% × W

W = 60%

So, value invested in risky assets = $100,000 × 60%

= $60,000

Value invested in risky assets is $60,000.

Option (A) is correct answer.