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  • Expected Return of Your Portfolio Be 17% Explanation

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    A portfolio is constructed using a risk-free asset earning 8% and a risky asset earning an expected 20% return with a 40% standard deviation. To achieve a portfolio standard deviation of 30%, the risky asset must make up 75% of the portfolio. With a 25% allocation to the risk-free asset, the expected portfolio return is calculated to be 17%.

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    Q4

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    A portfolio is constructed using a risk-free asset earning 8% and a risky asset earning an expected 20% return with a 40% standard deviation. To achieve a portfolio standard deviation of 30%, the risky asset must make up 75% of the portfolio. With a 25% allocation to the risk-free asset, the expected portfolio return is calculated to be 17%.

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    16 views1 page

    Expected Return of Your Portfolio Be 17% Explanation

    Uploaded by

    Kara
    A portfolio is constructed using a risk-free asset earning 8% and a risky asset earning an expected 20% return with a 40% standard deviation. To achieve a portfolio standard deviation of 30%, the risky asset must make up 75% of the portfolio. With a 25% allocation to the risk-free asset, the expected portfolio return is calculated to be 17%.

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    © All Rights Reserved
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    of 1

    Q4.

    Suppose you have the following investment options available: (a) Risk-free asset with a
    rate of return 8%, and (b) Risky asset earning an expected return 20%, and standard deviation
    40%. If you construct a portfolio of the above two instruments with a standard deviation of
    30%, what will the expected return of your portfolio be?

    Ans: Expected return of your portfolio be 17%


    Explanation:
    If you construct a portfolio of the above two instruments with a standard deviation of 30%
    Weight of Risky Asset = standard deviation of Portfolio/standard deviation of risky asset
    Weight of Risky Asset = 30%/40%
    Weight of Risky Asset = 75%

    Weight of Risk-free asset = 1-Weight of Risky Asset


    Weight of Risk-free asset = 1-75%
    Weight of Risk-free asset = 25%

    Expected return of your portfolio be = Weight of Risk-free asset x Expected return of Risk-free
    asset + Weight of Risky Asset x Expected return of Risky Asset
    Expected return of your portfolio be = 25%*8% + 75%*20%
    Expected return of your portfolio be = 17%

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