Question

The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, how much is the expected return on the complete portfolio?

Answer #1

**Given,**

**Return on risky portfolio = 15%**

**Risk free rate = 10%**

**Standard deviation on risky portfolio = 20%**

**Standard deviation on complete portfolio =
25%**

**Solution :-**

**Weight of risky asset = Standard deviation on complete
portfolio/Standard deviation on risky portfolio**

**= 25%/20% = 1.25**

**Weight of risk free asset = 1 - weight of risky
asset**

**= 1 - 1.25 = -0.25**

**Now,**

**Expected return on complete portfolio**

**= (Return on risky portfolio x weight of risky asset) +
(risk free rate x weight of risk free asset)**

**= (15% x 1.25) + (10% x -0.25)**

**= 18.75% - 2.50%**

**= 16.25%**

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