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Suppose a risk-free asset has a 3 percent return and a second risky asset has a...

Suppose a risk-free asset has a 3 percent return and a second risky asset has a 15 percent expected return with a standard deviation of 25 percent. Calculate the expected return and standard deviation of a portfolio consisting of 15 percent of the risk-free asset and 85 percent of the second asset. Provide your final answers up to two decimal points

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Answer #1

Given that Return on risk free asset is 3% and on risky asset is 15%. Standard deviation of risky asset is 25%. Se know that standard deviation of risk free asset is 0.

For a portfolio with 15% of risk free asset and 85% risky asset,

Expected Return= (W1*R1)+(W2*R2)

= (0.15*3%)+(0.85*15%)

= 0.45%+12.75%

= 13.20%

Standard Deviation of a riskfree asset and a risky asset is calculated as (Weight of the risky asset)*(Standard deviation of risky asset)

= 0.85*(20%)

= 0.17

So, Expected Return of Portfolio= 13.20%

Standard Deviation of portfolio= 0.17

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