Question

Suppose you invest equal amounts in a portfolio with an expected return of 12% and a standard deviation of returns of 16% and a risk-free asset with an interest rate of 2%. calculate the expected return on the resulting Portfolio.

A. 9%

B. unable to determine without knowing the correlation coefficient

C. 8%

D. 7%

E. 12%

F. 2%

SHOW WORK PLEASE

Answer 1

The return of a portfolio is the weighted average return of the securities which constitute the porfolio. Here you invest equal amounts in both the securities, weight will be 50%.

Stock	Weight	Expected Return (%)	Weight*Expected Return
portfolio	0.50	12.00	6.00
Risk free asset	0.50	2.00	1.00

Portfolio Return = Weight*Expected Return

= 6+1

= 7%

Since the weights are same, it can also be calculated as average of returns.