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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,

Risk free rate Rf = 3%

Expected return on a risky asset Rr = 15%

standard deviation of the asset SDr = 25%

Portfolio consist of Wf = 15% of risk free asset and Wr = 85% of risky asset

So, expected return on the portfolio is weighted average return on its assets

=> Expected return on portfolio E(p) = Wr*Rr + Wf*Rf = 0.85*15 + 0.15*0.03 = 13.20%

Standard deviation of a portfolio with risk free asset is

Standard deviation of portfolio SD(P) = Wr*SDr = 0.85*0.25 = 21.25%

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