Question

You invest 40% in a risky portfolio, and 60% in a treasury bill. The risky portfolio has an expected return of 15% and a standard deviation of 25%. The treasury bill pays 7%. Suppose that your risky portfolio includes the following investments in the given proportions: Stock A 30%Stock B 30%Stock C 30%Stock D 10%(a)(3 points) What are the investment proportions in the complete portfolio, including stock A, B, C, D and the Treasury bill? (b)(3 points) What is the expected return and standard deviation of your complete portfolio?

Answer 1

Given about complete portfolio,

invested Wr = 40% in a risky portfolio, and Wf = 60% in a treasury bill.

Expected return on risky portfolio Rr = 15%

Standard deviation of risky portfolio SDr =25%

Risk free rate Rf = 7%

Risky portfolio includes, 30% stock A, 30% stock B, 30% stock C and 10% stock D

a). Investment proportion of each asset in complete portfolio is

Proportion of stock A in complete portfolio = 30% of 40% = 12%

Proportion of stock B in complete portfolio = 30% of 40% = 12%

Proportion of stock C in complete portfolio = 30% of 40% = 12%

Proportion of stock D in complete portfolio = 10% of 40% = 4%\

Proportion in T-bill = 60%

b). Expected return on complete portfolio is weighted average return on its assets

=> Expected return on complete portfolio = Wr*Rr + Wf*Rf = 0.4*15 + 0.6*7 = 10.20%

standard deviation of complete portfolio = Wr*SDr = 0.4*25 = 10%