Question

Consider the following information about a risky portfolio that
you manage and a risk-free asset: *E(r _{P})* = 14%,
σ

RP=

RFA=

**b.** What will be the standard deviation of the rate
of return on her portfolio? **(Do not round intermediate
calculations. Round your answer to 2 decimal
places.)**

SD=

Answer #1

Part A:

Portfolio Return is the weighted avg return of securities in that portfolio

Let y be the weight of investment in Risky Portfolio.

Stock |
Weight |
Ret |
WTd Ret |

Risky Portfolio | y | 0.1400 | 0.14y |

Risk Free Asset | 1 - y | 0.0500 | 0.05 -0.05y |

Portfolio Ret
Return |
0.0700 |
0.05 +
0.09y |

Given Portfolio ret = 0.06

Thus 0.05 + 0.09y = 0.06

0.09y = 0.06 - 0.05

= 0.01

y = 0.01 / 0.09

= 0.1111

**Weight in Risky Portfolio 11.11%**

**Weight in Risk Free Asset 88.89%**

Part B:

Portfolio SD = Weight in RIsky portfolio * SD

= 0.1111 * 17%

**= 1.89%**

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