Question

Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 18% and a risk-free asset with an interest rate of 4%. Calculate the expected return on the resulting portfolio.

Answer 1

Answer:

Expected return on resulting portfolio = 10%

Explanation:

We are given the following:

Expected return or mean = 16%

Interest rate = 4%

Standard deviation of returns = 18%

We have the formula:

Expected return on the resulting portfolio = (mean/2) + (interest rate)/2

= (0.16/2) + (0.04/2) = 0.1

= 0.1*100 = 10%

Answer 2

The expected return on the resulting portfolio is 10%.

Using this formula

Expected return  = (Portfolio weight ×Portfolio expected return) + (Portfolio weight× risk-free rate)

Where:

Portfolio weight=0.5

Portfolio expected return=16%

Risk-free rate=4%

Let plug in the formula

Expected return  = (0.5×16%) + (0.5× 4%)

Expected return  = 8% + 2%

Expected return  =10%

Inconclusion the expected return on the resulting portfolio is 10%.

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