Question

You have constructed a portfolio consisting of 65 percent risky securities with expected return 17 percent and standard deviation 12 percent and 35 percent T-bills with a return of 0.4 percent. Find the expected return and standard deviation of this portfolio.

Answer 1

Answer:
Weight of Risky Securities = 0.65
Weight of T- Bill = 0.35

Return on Risky Securities = 17%
Return on T-Bill = 0.4%

Standard Deviation of Risky Securities = 12%
Standard Deviation of T-Bill = 0%

Expected Return of Portfolio = (Weight of Risky Securities * Return on Risky Securities) + (Weight of T- Bill * Return on T-Bill)
Expected Return of Portfolio = (0.65 * 17%) + (0.35 * 0.4%)
Expected Return of Portfolio = 11.19%

Standard Deviation of Portfolio = (Weight of Risky Securities * Standard deviation of Risky Securities) + (Weight of T- Bill * Standard deviation of T-Bill)
Standard Deviation of Portfolio = (0.65 * 12%) + (0.35 * 0%)
Standard Deviation of Portfolio = 7.80%